Volatility index posts sharpest rise in 2 weeks on dull buying

After falling to a two month low, the India VIX rose by 6% to 25.6 on Thursday. This is the sharpest rise for the VIX?a gauge of underlying market volatility?in more than two weeks.

Experts cite the recent movement of VIX in the range of 24-26 to be an evidence of a lack of buying interest in the market instead of creation of fresh short positions.

However, traders also believe that a breach of 5,000 on the lower side for the Nifty could lead to a sharp rise in market volatility.

On Thursday, Nifty closed at 5,091 or 47 points lower.

?The market trend continues to remain bearish? says T S Harihar, derivatives head at ICICI Securities.

?On breach of 5,000-mark on the lower side, the Nifty could move towards its August and October lows of 4,730 before making a new low for 2011. However, given the sharp decline in the market volatility in the past one week, the market could drift lower at a slower pace,? he added.

India VIX, which depicts the implied volatility or expected market volatility over the period of next one month, has declined by about a quarter from its two year-high of 33.88 reached on August 26.

On Wednesday the VIX closed at 24.05, its lowest level since August 5.

However, in absolute terms, the current VIX value near 25.5, is higher than its 2011 average of 23.2.

In October so far, the VIX had averaged 29.6, a tad lower to its September average of 30.45, which was a highest average in more than two years.

According to Savio Shetty, derivatives analyst with Prabhudas Lilladher, each bear and bull market comes with its respective range of volatility.

Between November 2010 and May 2011, the initial period of market turmoil, the VIX never fell below 24, despite the equity market experiencing a one day decline of 4 to 5%.

?However, post May 2011, as traders started discounting the domestic as well as global headwinds, with the number of risks weighing on the market starting to rise, the volatility surged,? said Shetty.

Notably, the average value of VIX, which stood at about 21.5 between November 2010 and April 2011 jumped to 24 since May 2011. Since the start of August, the VIX has averaged at about 29.5.

?Given the psychological importance of the support at 5,000-mark, a breach on the lower side could again push the VIX towards its September levels of 30,? said Shetty.