What should investors make of wild moves in India VIX? Here's what experts say ​

The historical data suggests that post elections, India VIX, a measure of market’s expectation of volatility in the near term, generally sees a downtrend. And this time around D-Street witnessed a distinct trend i.e. after a sharp decline to the tune of 20 per cent on April 23 to levels of 10.2. And lately, India VIX has climbed again and scaled to levels of 12.87, last gaining over 5 per cent in the previous trading session.

Volatility i.e. used to assess risk and India VIX is a volatility index based on the NIFTY Index Option prices. From the best bid-ask prices of NIFTY Options contracts, a volatility figure (%) is calculated which indicates the expected market volatility over the next 30 calendar days.

Market experts view on India VIX and what market participants should know?

Santosh Meena, Head of Research, Swastika Investmart held that we're witnessing intriguing movements in India VIX ahead of the election. Historically, India VIX tends to ascend preceding the election, fueled by anticipation of uncertainty and significant market shifts. However, it typically experiences a sharp decline post-election once the outcome is determined.

The sharp decline of over 20 per cent on April 23 may be symbolic of the markets already pricing in a BJP victory, indicating that a major post-election move might not be anticipated. Nonetheless, it's noteworthy that India's VIX is rebounding sharply from its historical low of 10.

Further, the expert added that the recent surge in India's VIX, coupled with the market rally, suggests that investors are positioning themselves on the long side while also hedging their positions. Typically, India VIX rises when there are significant buying options. Presently, we're observing a trend of increased buying in call options to capitalize on bullish positions, alongside purchasing put options to hedge portfolios. Consequently, this surge in options activity is contributing to the rise in India VIX.

On the current trend and dynamics witnessed on India VIX, Arvinder Singh Nanda, Senior Vice President, of Master Capital Services maintains that while reduced uncertainty around election outcome and settling geopolitical issue are some factors, the decision by the National Stock Exchange (NSE) to reduce the lot size of Nifty derivative contracts from 50 to 25 is also another prominent reason. This is as the India VIX is calculated based on the bid-ask quotes of near and next month's Nifty option contracts. 

How India VIX can trade going ahead?

Meena added that it's probable that India VIX will continue to climb as we approach the election outcome, but the extent of its increase may be limited due to a certain level of certainty prevailing in the market. In previous election cycles, India VIX reached levels of 40 and 30 in 2014 and 2019, respectively. However, this time, given the existing market dynamics and perceived stability, the rise in India VIX may not reach such elevated levels.

Nanda, on the other hand, added that India VIX is presently trading around 13, rebounding sharply from its five-month low of 9.85. Currently, there has been a coupling between the VIX and key indices, a trend that is expected to persist until the election results. The likelihood of India VIX declining ahead of the election result appears low, as volatility is expected to continue increasing. However, following the election outcome, a stable result could prompt a decline in VIX accompanied by an increase in stock prices. Conversely, an unexpected outcome has the potential to trigger increased volatility and a subsequent drop in stock prices.