Nifty traders perplexed as fear gauge index crashes 22%. Is that good or bad news?
Nifty option traders were left scratching their heads today after India VIX, Dalal Street's indicator of volatility in the near term, crashed as much as 22% in one of its worst single-day falls in stock market's history.
India VIX, calculated using the best bid and ask quotes of out-of-the-money near and mid-month Nifty option contracts, fell below the 10-mark. During the day, Nifty rose up to 0.5% higher to the day's high of 22,447.
“Such sharp falls in India VIX were last seen once the Lok Sabha election results were announced. In 2014 and 2019, it dropped by almost 34% and 30% on the day of results. Today’s drop is the biggest fall after these two falls,” said Apurva Seth of Samco Securities.
The barometer measures the market expectations of volatility over the next 30 days. So a lower VIX means low expectations of volatility and vice versa.
«Traders may be factoring in the fact that the geopolitical tensions will ease and that things are looking good on the domestic front. Vodafone Idea's FPO subscription numbers show that there is enough liquidity in the market and companies will get funds at a particular valuation even if there are financial issues,» said Deepak Jasani of HDFC Securities.
So does India VIX indicate that traders are more confident about the ongoing upswing?
“Option traders react to such scenarios by reducing the expectation of premium expansion. But the suddenness of VIX’s fall today, especially when Nifty barely rose above 0.5%, needs to be factored in when acting on the VIX’s signal,”
