Volatility index comes off March highs as liquidity keeps markets in positive territory

June 10, 2020 1:00 AM

VIX is calculated on the basis of the order book of Nifty options and it helps traders gauge the movement of the market for the next 30 days.

Volatility index, liquidity, Indian equities, Kotak Securities, India VIX, Nifty, BNP ParibasThe markets since the past two weeks had been pricing in positive news such as that of the US jobs data which saw an addition of jobs instead of a decline.

By Urvashi Valecha

The violent swings in the markets have stabilised with the earnings seasons drawing to a close and liquidity chasing some quality stocks yet again. Indian equities have steadily risen on the back of higher liquidity and positive global cues. India VIX — volatility index — as of Tuesday’s close was at 30.26, a decline from the peak of 83.6 it had reached on March 24.

VIX is calculated on the basis of the order book of Nifty options and it helps traders gauge the movement of the market for the next 30 days. Indian markets’ gains from May 26 till Monday stood at 12.6%, while during that time the India VIX levels were at around 30. India VIX at the start of May stood at 43.67. Under usual circumstances, India VIX is typically between 10 to 15.

According to market experts, India VIX has declined due to some semblance of stability in the market. Shrikant Chouhan, executive vice-president for equity technical research, Kotak Securities, said, “India VIX has historically risen when there is uncertainty in the market and fallen when there is some semblance of stability in the market. Volatility goes up because traders start buying more and more options (call and put) since they expect the markets to trade in a very broad range due to the uncertainty of what will happen next in the morning. When there is some certainty such as the one currently due to the exiting of lockdowns and global rush of liquidity, then the volatility comes down,” he said.

The markets since the past two weeks had been pricing in positive news such as that of the US jobs data which saw an addition of jobs instead of a decline. That being said, the market experts are anticipating that India VIX could decline some more before seeing another short-term bounce because of a correction in the Nifty. According to Gaurav Ratnaparkhi, senior technical analyst, Sharekhan by BNP Paribas, 26.5 would be a strong support level for India VIX. “At 26.5, the India VIX will have seen a 78.6% retracement since the peak that it reached from 10 from February to March. Whenever there is a pullback or retracement, 78.6% is a crucial level since there is a high probability of reaction at these levels. So, in other words, India VIX is at a level where it can attempt a short term bounce.”

Other experts, however, see 30 as a strong support level for India VIX. Kotak Securities’ Shrikant Chouhan believes that a run like 2010 cannot be ruled out where it took the market more than a year to recover from the dramatic decline in 2008. He sees India VIX come down to 20. “In the short-term VIX will come down to 20 and will quote in a trading range between 20 and 40. For the VIX, 30 will act as a strong support. If we consider that the markets have reached a level, it can go up to 40 in the next few days but, it will eventually come down to 20,” said Shrikant Chouhan of Kotak Securities.

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