India VIX, a measure of investor perception about the risk of sharp swings based on options prices, has hovered around the 21-25 levels in the past two months despite the volatile movements in the Nifty index in May.
Market participants feel that the VIX index has not been able to reflect the true nature of volatility in the Indian markets for quite some time now. ?The gauge has kind of lost its ability to capture or predict the volatility in the market. We typically average out the At The Money Option IVs to get a better picture on volatility,? said Savio Shetty, derivative analyst at Prabhudas Lilladher. India VIX is computed using the best bid and ask quotes of the out-of-the-money near and mid-month Nifty option contracts, which are traded on the F&O segment of NSE. The higher the India VIX values, higher the expected volatility and vice-versa.
India VIX mostly fluctuated between the 21 and 25 levels in May, when the Indian equities were facing numerous headwinds and the benchmark NSE Nifty declined by more than 6%. The dismal GDP numbers, rupee depreciation and the escalating crisis in euro zone contributed to the spate of negative news last month. The volatility index touched its highest value of 27.84 on March 2 this year and closed at 26.25 on February 21, the day the market touched the year?s high of 5,607. On Thursday, the gauge closed at 25.71, a day when the Nifty touched 5,054. VIX touched its historical peak of 85.13 on 17 November 2008, in the aftermath of the collapse of Lehman Brothers. Market participants don?t expect the volatility index to move up much in the next few months. ?It will increase only if the markets correct significantly and break the 4,800 levels,? said Jain.