Traders are increasingly turning risk-averse with uncertainty looming over recovery of global economy as well as inflation in the domestic economy. The volatility in the Indian equity markets shot up the highest for the year on Friday.
India?s VIX, a gauge of market volatility, gained 23% to close at 24.9.However,the jump in the volatility index was comparatively less for Indian equities than that of the United States. The CBOE VIX-a global volatility index on Chicago Board Options Exchange?surged 35% on Thursday to close at 31.6.
Experts believe that the jump in market volatility in general indicates the risk-aversion amongst traders. However, Friday?s highest single day jump since May 2010 was the result of extreme panic amongst traders as they continued to sell in the first half of the trading session.
?During the trading session, the open interest in the Nifty August future went as high as 2.9 crore shares while the markets continued their decline indicating a sustained selling pressure,? says Savio Shetty, a derivatives analyst at Prabhudas Lilladher.
He added that during the second half of the day, the open interest in the Nifty August future came down to end at 2.3 crore shares, down 2% from Thursday, indicating that the second half saw more of long ( buy ) liquidations instead of fresh shorts. After falling to an intraday low of 5,117 at the end of the first half of the market trading session, Nifty recovered 94 points to close at 5,211.Even the higher impact cost is deemed responsible for adding into volatility.
?Over the past few months the volumes in the market have remained muted which has affected the impact cost (the difference between bid and ask price). As the impact costs have increased across the market, the trade execution in a selling market could have added to the volatility,? added Shetty.
According to Siddarth Bhamre, head of equity derivatives at Angel Broking the plunge in global markets and the simultaneous jump in volatility indicate weariness amongst traders.
?Investors all over the world seem to be averse towards the equity market and the pain for the market may not be over as yet. Any rebound from hereon should be used to average short positions. The Nifty may continue its slide towards 5,150,? he said.
Notably, Nifty August 5,200 calls added the highest open interest of 37.6 lakh shares, indicating the importance of this level. On the put side however, both 4,900 and 5,000 strikes saw writing of 29 lakh shares, outlining the next range towards which the Nifty could plunge if 5,200 gives away.
?Given that the Nifty opened with a gap of about 120 points, a rebound in the markets towards 5,350 cannot be ruled out. However, it is likely to find a very strong resistance there. The Nifty also needs to sustain the above-5,200 mark for this to unfold,? added Shetty.