Volatility index VIX crosses 17 mark; here is what to make of it

India VIX, a volatility gauge also referred to as the fear index, surged in Tuesday’s trade by another 5.78 per cent to hit levels over 17 as the Phase 3 polling of the Lok Sabha elections is underway.

Santosh Meena, Head of Research, Swastika Investmart maintained that the rise in the index aligns with historical trends, as the VIX typically climbs before major events like general elections. In 2019, it saw a 150% jump (from 12 to 30), and in 2014, it spiked 212% (from 12.5 to 39). Based on this historical context, a further increase in the VIX is likely, with a potential move towards 25 before the election results.

Relating the rise in India VIX to peaks hit on the index, Anand James, Chief Market Strategist, Geojit Financial Services stated, "seen in isolation, the present levels of VIX are consistent with historical trends, which usually witness a rise in VIX when previous peaks are re-visited. In early April 2024, when Nifty tested a new record peak, VIX was near 11, but now above 16, when we are again back in the vicinity of the record peak. Similarly, when in mid January 2024, when we saw a new peak in Nifty, VIX was 13.78, but three weeks later when Nifty returned to the same peak, VIX would rise to the 15-16 region, where it remained for the rest of February. 

Factors pushing India VIX higher

Santosh Meena further noted that two key factors that are driving gains in India VIX. First, portfolio investors are buying protective put options to hedge their holdings. Second, traders are speculating on significant price movements post-election by purchasing both calls and put options.

“While a lot can be explained in terms of historical trends, approach of record peaks, upcoming election results, and even the liquidity impact on lot size reduction in Nifty, the recent swings are difficult to be fully attributed to,” added James.

How should investors and traders approach rising India VIX?

James suggests that the right way to approach the rising India VIX is by acknowledging that while VIX and Nifty are positively correlated, more so in a large time frame, the strength of correlation is low, especially in the short term. 

“The mean of straddles during the time period of Feb to Apr 2024 is 198 with a standard deviation of 23, while the straddle on Tuesday, 23rd April, when VIX fell 20% is 180, suggesting that on a closing basis premiums never went as wild as VIX. So it was just another Tuesday for option premiums, though the impact would have been a tad higher on an intraday basis. My sense is that VIX needs to sustain above 16 to elucidate higher fluctuations in option premiums,” he added.

“The market's behavior so far resembles the 2019 pre-election period, with a potential correction followed by an upswing on results day. Crucial support levels to watch include 22300, 22000, and 21700 on the Nifty. For an upward trend to be established, a breakout above 22800 is necessary,” added Santosh Meena.