Traders' risk perception gauge rises to yearly high

Implied volatility index nears one-year high

A key measure of traders’ perception of near-term risks in equities rose to the highest in a year on Friday, unnerved by the US Federal Reserve’s announcement to roll back the stimulus package beginning later in 2013  

National Stock Exchange’s India Volatility Index (VIX), which gauges traders’ expectations of volatility based on Nifty index options, hit 19.73 earlier on Friday, the highest level since last year. The Vix could have crossed 20 but for the slight rebound in the markets, led by short-covering ahead of the weekend. Analysts said the current levels of the VIX, which has moved between 14 and 20 in recent months, signals that traders are still not confident the worst is over for the markets. NSE Nifty closed at 5,667.65, up 11.75, or 0.2 per cent, recovering from a low of 5,616.85 touched during the day.

The risk gauge has shot up from 16 levels to near-20 levels as two crucial events —- the Reserve Bank of India (RBI) monetary policy and the Federal Open Market Committee (FOMC) meet — were lined up.

VIX captures implied volatility - traders expectations of future volatility - and is a key component of options pricing. So, higher the VIX, the cost of buying options increases. Investors and traders usually buy options when the general undertone is nervous. During 2008, implied volatility remained very elevated — in the range of 35 and 70. But, in the past one year, the range for VIX has remained below 20 levels.   

Some derivative analysts do not expect VIX to rise further from current levels if the market sees a bounce back.

“The VIX index had moved up as the market was worried about the outcome of the Fed meet. However, we expect the market to rebound as it has fallen too much. If that happens, VIX would fall from current levels,” said Savio Shetty, research analyst, institutional derivatives at Prabhudas Lilladher.

“VIX will come down from here as it is trading near its higher band of standard deviation. This year, VIX has moved in a narrow range of between 15 and 18. This is the sign of a good market,” said a derivative analyst with a foreign brokerage requesting anonymity.

Not just domestically, but risk perception has shot up across global markets as well as investors were disappointed with Fed’s decision to taper bond purchases.  

According to Bloomberg data, the Chicago Board Options Exchange Volatility Index, a measure of contracts on the Standard & Poor’s 500 index, has risen more than 20 per cent, while both the volatility indices for emerging markets and gold rose over 30 per cent each.

Global markets yesterday saw their worst fall since September 2011, while gold prices fell to near three-year lows. India’s benchmark Nifty yesterday ended at 5,655.9, down nearly three per cent.