The Volatility Index follows previous trends, jumping 70% from its April lows in the lead-up to the election results.
The recent surge and subsequent decline of India VIX has caught the attention of many due to its rapid and significant fluctuations within a relatively short period of time. |
| election impact on Indian stock market |
The India VIX, also known as the Volatility Index, surpassed the crucial threshold of 17 on Tuesday, May 07, indicating heightened investor sentiment and fear in the market. With a remarkable surge of over 70% from its low of 10 on April 23, the volatility gauge is currently on an upward trend. This increase in volatility is primarily driven by the approaching general elections and investor uncertainties surrounding the final result.
According to Santosh Meena, Head of Research at Swastika Investmart, the uptick follows historical trends, with the VIX typically escalating before major events like general elections. Historical data reveals that the index experienced a surge of 150% in 2019 and over 200% in 2014. Meena anticipates that considering this historical context, there is a high likelihood of further increase in the VIX, potentially reaching 25 before the election results.
Anand James, Chief Market Strategist at Geojit Financial Services, mentioned that despite historical trends, factors such as record peaks, upcoming election results, and liquidity impact on lot size reduction in Nifty make it challenging to fully explain recent swings. He suggested that while VIX and Nifty show a positive correlation, especially over a large time frame, the correlation strength is low in the short term.
According to Santosh Meena, Head of Research at Swastika Investmart, the uptick follows historical trends, with the VIX typically escalating before major events like general elections. Historical data reveals that the index experienced a surge of 150% in 2019 and over 200% in 2014. Meena anticipates that considering this historical context, there is a high likelihood of further increase in the VIX, potentially reaching 25 before the election results.
Anand James, Chief Market Strategist at Geojit Financial Services, mentioned that despite historical trends, factors such as record peaks, upcoming election results, and liquidity impact on lot size reduction in Nifty make it challenging to fully explain recent swings. He suggested that while VIX and Nifty show a positive correlation, especially over a large time frame, the correlation strength is low in the short term.
Technical factors
Technical factors influencing the rise of the VIX can be attributed to two key factors. Firstly, portfolio investors are actively purchasing protective put options as a means to hedge their existing holdings. Secondly, traders are engaging in speculation by acquiring both calls and put options, anticipating significant price movements following the election. Meena, an expert in the field, has highlighted these factors. Analyzing the mean of straddles between February and April 2024, it is found to be 198, with a standard deviation of 23. However, on Tuesday, April 23rd, when the VIX experienced a 20% decrease, the straddle value was recorded at 180. This suggests that, on a closing basis, premiums did not exhibit the same level of volatility as the VIX. James from Geojit explains that this occurrence was relatively normal for option premiums, although the impact may have been slightly more pronounced on an intraday basis. To observe higher fluctuations in option premiums, the VIX would need to maintain a level above 16, according to James.Support levels
The market's current behavior mirrors that of the 2019 pre-election period, suggesting a potential correction followed by an upswing on results day. Important support levels to monitor on the Nifty are 22300, 22000, and 21700. Meena highlighted the significance of a breakout above 22800 for the establishment of an upward trend.
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