Volatility index trading on anvil

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Mumbai: With a rising number of market participants closely tracking India Vix, the volatility index that indicates markets’ expectation of volatility in the near term , the National Stock Exchange (NSE) would like to start trading in the index. An NSE official said the exchange would soon approach the Securities & Exchange Board of India (Sebi), the market regulator, for its approval.

“NSE will be approaching Sebi to launch trading in India Vix, if the market situation improves further,” the official said.

India Vix, based on the Nifty 50 Index Option prices, indicates buying and selling in the option market. Options contracts have emerged as a key hedging tool for investors in the recent stock market crisis. Such contracts now constitute over 45% of the total derivative contracts on NSE compared to 28% recorded during the same period last year.

On May 13, 2008, out of the total derivative contracts of 16 lakh, options made up just 2.94 lakh contracts, but have increased to 13.04 lakh on May 13, 2009.

TS Harihar, vice-president, derivatives, ICICI Securities, said, “It will be a good move, as there are several advantages of India Vix. Investors will get an option to take a call on expected volatility. However, since it is a very new concept, it will take some time to catch up among investors.”

Market players added that it can be a hedging tool for portfolio managers as well. The reasoning is that, if an investor expects the stock market volatility to increase he can take a long call (buying) on Vix, and take an opposite position if he expects the volatility to fall.

Globally, the Chicago Board Options Exchange (CBOE)’s Vix, launched in 1993, is the most popularly tracked volatility index, and is considered the benchmark for stock market volatility. The trading volume in CBOE Vix was a record 108.9 million contracts during March 2009, up 17% over March 2008 and 35% over February 2009. This was when equity markets were languishing. An average of nearly five million contracts per day was traded during March, 6% greater than the 4.6-million-contract average daily volume (ADV) in March 2008 and a 17% increase over February 2009 ADV of 4.2 million contracts.

The NSE official further said that there are several other new initiatives in the pipeline that will be announced over time.