NEW DELHI: Ahead of the general elections results, volatility index, or India VIX, surged for the ninth straight session on Tuesday to hit a fresh 52-week high, sending jitter in the market.
The index hit a high of 17.63 on Tuesday and later closed at 17.01, up 2.45%. With this, the fear gauge has jumped more than 70% in the last nine trading sessions.
“The rise aligns with historical trends, as the VIX typically climbs before major events like general elections… Based on this historical context, a further increase in the VIX is likely, with a potential move towards 25 before the election results,” said Santosh Meena, Head of Research at Swastika Investmart. The historical data shows that the index has seen a jump of 150% during 2019 and over 200% in 2014.
Meena further states that two key factors are driving the VIX’s rise. First, portfolio investors are buying protective put options to hedge their holdings. Second, traders are speculating on significant price movements post-election by purchasing both calls and put options.
The India VIX is a volatility index calculated by the NSE from the order book of NIFTY options. The best bid-ask quotes of near and next-month NIFTY options contracts traded on the NSE’s F&O segment are used for this. India VIX reflects investors’ perceptions of market volatility in the near term, i.e. it portrays market volatility over the next 30 calendar days.
The fresh surge in India VIX comes after it had dropped 20% to 10.2 levels on April 23 when bulls were all over the market. Since then the index has seen a sharp spike, raising concerns among market participants. Equity market benchmarks – BSE Sensex and NSE Nifty have fallen more than 2% each in the last three sessions.
“While a lot can be explained in terms of historical trends, the approach of record peaks, upcoming election results, and even the liquidity impact on lot size reduction in Nifty, the recent swings are difficult to fully attribute,” said Anand James, Chief Market Strategist at Geojit Financial Services.
James added that what is raising eyebrows now is how steep and the extent of the rise and fall is despite the short time frame. Just three weeks back, the VIX had fallen to record lows, after Nifty averted a major fall and bounced off the previous month’s low, calming investors.