India VIX rises over 41% amid uncertainty around LS polls; what should investors do?

India VIX, a volatile index that measures the market's anticipation for volatility and fluctuations in the near term, rose over 37 per cent. At around 12:46 p.m., Indian VIX was up 41.34 per cent. As per Anand James, Chief Market Strategist, Geojit Financial Services, a rise in India VIX suggests that market expectation for downside surprise has eased.

What does India VIX rise mean?

"VIX has eased which suggests that market expectation for downside surprise has eased. Historically VIX collapses immediately after maturity of the event, which suggests that call premia have limited room for upside, even if results best exit poll outcome in favour of the ruling party," said James.

He added, however given the fact VIX is yet to slip below 20, an expectation of outlier is still very present. 

Echoing a similar view, Osho Krishan, Sr. Technical and Derivatives Analyst, Angel One said the India VIX surged by over 35 points, indicating a high level of uncertainty and potential volatility in the equities market. 

How is India VIX's movement related to LS results? 

Vinnaayak Mehta, Founder, The Infinity Group believes the recent surge in the India VIX Index has prompted speculation among stock market observers regarding its implications for the outcome of the Lok Sabha elections.

"While some attribute the rally to concerns over the ruling coalition's victory margin, particularly the BJP's seat tally, others point to broader factors such as geopolitical tensions and rising US Treasury yields driving the volatility index. However, it's essential to note that the rising India VIX Index doesn't necessarily indicate doubts about the BJP's victory but rather potential implications if their standalone seats fall below 300. In such a scenario, the Indian stock market could experience significant selling pressure post-election results, scheduled for June 4th, 2024," said Mehta.

What should you do?

As per Krishan, to mitigate the impact of turbulent market swings, it would be prudent to refrain from active trading and adopt a cautious stance until the final verdict is out.

James suggests an iron condor or iron butterfly options strategy, which bets on VIX’s collapse, but also limits risk, in order to account for wild scenarios.

Atul Parakh, CEO of Bigul believes investors should avoid knee-jerk reactions and reassess portfolios based on risk profiles. Quality stocks at discounted valuations are opportunities for long-term holders. 

However, he added a brace for volatility until the election results provide clarity. Diversification across asset classes remains crucial. Consult financial advisors to review portfolios. Once the political landscape settles, the market could find support if a stable government emerges to drive economic reforms.

Sandeep Tandon, CEO & Director-Quant MF, believes that India VIX reflects fear to be peaking out and sees the current downside as a good buying opportuntiy.

Technical view 

"Traders who engage in shorting volatility typically pay close attention to the India VIX. In our recent research, we have discovered that the sweet spot for entering into a short volatility strategy is when vix is between 15-25. When VIX is more than 25, while the possibility of profit increases, drawdown increases significantly. Hence we should wait for VIX to cool down and fall below 25 before taking any fresh positions. Conversely, for investors, the decline in stock prices presents a favourable opportunity to accumulate more stocks at reduced prices, considering that the performance of these stocks is ultimately influenced by their earnings and management pedigree," said Sujit Modi, CIO, Share.Market

Why is the market falling? 

The market crash can be linked to rising rates and recession fears, but also the uncertainty surrounding the ongoing Lok Sabha elections.

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Catch all the latest updates on the counting of votes for Lok Sabha, state Assembly and bye elections here.

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