Fear index VIX jumps 22%, be ready for sharp movements

India VIX, popularly known as the fear index, jumped more than 22% on Thursday as the benchmark indices plummeted about 4% on worries about the global economy. On Thursday, it closed at 33.88, its highest closing since May 25, 2010 when it had closed on 34.37. The implied volatility in the Indian equity derivatives market has remained high for the September series.

At an average of 29.46 September series so far, India VIX stands at a highest monthly average for any series since September 2009. VIX value below 20 usually represent complacent times for the market and a value above 30 is an indication of high volatility.

?India VIX has remained at a higher range of 24-34 in the past 3-4 months because of the European crisis. Whenever there is fear in the market, traders resort to buying options, which pushes up the implied volatility,? said Savio Shetty, derivative analyst, Prabhudas Lilladher.

A VIX value of 33.8 implies that on an annualised basis, Nifty is expected to move either up or down by 2.5%over the next one month from current levels. This could mean a movement of points up or down.

The current VIX levels indicate there is likely to be sharp swings in the market for the next month. Still, the current VIX levels are way below its peak of 85.13 that it had touched on November 17, 2008, in the aftermath of the collapse of investment bank Lehman Brothers.

India VIX is mirroring global volatility trends. On Wednesday, the Chicago Board Option Exchange?s CBOE Volatility Index, based on S&P 500 Options prices, rose 13.5% to 37.32. In the last one month, the gauge has hovered above the 30-plus levels.

According to Saurabh Mukherjea, head?equities, Ambit Capital, in the past 10 years, fluctuations in Chicago VIX has widely influenced inflows from foreign institutional investors into India.

?If the VIX rises, the resulting risk aversion tends to reduce inflows into emerging markets like India which are perceived to be risky,? he said. Mukherjea believes the Chicago VIX and FII inflows have had an almost 70% correlation.

According to market participants, India VIX values are likely to remain at elevated levels for some more time. ?The uncertainty in the US and European economies is likely to continue. Though the governments are aware of the problems there seems to be no definite solution in sight,? said Shetty.