Deviates from trend of inverse relation as options preferred
Deviating from its usual trail, India VIX ? a gauge of underlying market volatility ? has risen in the recent past as the Nifty moved towards its 14-month high. During the last two weeks, in which the 50-share Nifty rose 6.5% to 5,690, the volatility index increased 24% to 18.88 ? its highest in more than two months. Experts cite the recent market rally as a reason for the spurt in volatility as unprepared traders flocked towards options to execute their trading view.
?Generally, the volatility goes up when the market is in a downtrend. However, this time around, it has risen with a rising market because the recent rally was unexpected by many traders,? says Siddarth Bhamre, head of derivatives, Angel Broking.
According to him, traders who were caught off-guard by the sudden surge in the markets, have used both call and put options to carry out their trading strategies, in turn adding to the market volatility. Volatility index represents the market’s expected volatility over the next one month and is derived from the prices of the Nifty index options. It is a measure of the amount by which an underlying Index ? the Nifty ? is expected to fluctuate in the near term.
Traders point out that, historically, global markets witness higher volatility in October. However, in case of the recent rise in India VIX, the primary reason is the hedging strategies being carried out.
?While it is not a seller’s market, traders also want to avoid being stuck on the wrong side if there is a correction after a one-sided ascent of about 6%,? said another trader.
Even as call options help to play on the long side if the market continues to rise, traders are also looking to use put options to hedge their market exposure in case of a correction.
?Traders are also opting for straddle strategy in which calls and puts of the same strike price and same expiry are bought on expectations of a significant move on either side,? said Savio Shetty, derivatives trader, institutional equity, Prabhudas Lilladher.
In the last three months, the VIX was on a decline, owing to a muted market activity also as the benchmark Nifty moved towards the 5,300 mark. It hit an all-time low of 14.76 on the special trading session carried out on September 8.
Between June and first week of September, the VIX declined more than 40%. Even its international counterpart, CBOE (Chicago Board Options Exchange) VIX, touched a five-year low in mid-August.
