October series is an event-full one for the markets from both global and domestic front. However, the uncertainty over the outcome has made investors all across jittery and the same is getting reflected in the performance of the stock markets.
A looming Reserve Bank of India’s credit policy review and July-September earnings of India Inc. is adding to the already frail sentiments of the investors which were rattled earlier on account of US debt ceiling debate and budget impasse.
CBOE Volatility index, a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices, rose 6 per cent to 17.67 levels in yesterday’s trade.
Taking cues globally, India VIX (Volatility Index), the key gauge to measure market volatility, spiked nearly 5 per cent to 26 levels in today’s trade as uncertainty creeps in ahead of key events.
“If India VIX moves above 28 then again we may see an uptick of 32-33 levels, "said Chandan Taparia, derivative analyst at Anand Rathi Financial Services.
VOLATILITY VS MARKET RETURNS
There is a strong correlation between volatility and market performance. Volatility tends to decline as the stock market rises and increases as the stock market falls.
So does this mean that a rising volatility could wipe-off your profits?
Market experts believe that a sustained period of rising volatility could lead to negative returns. Market volatility usually varies from country to country depending upon domestic monetary or policy events.
“High volatility primarily indicates directional uncertainty on account of impacting events. I do expect volatility to remain high and hence have a direct impact on the market returns,” said Sahaj Agrawal, Deputy Vice President – Derivatives Research at Kotak Securities.
HOW TO PLAY MARKET VOLATILITY?
The higher level of volatility can lead to bearish sentiments in the markets. It also adds to the level of concern and worry on the part of investors as they watch the value of their portfolios move more violently and decrease in value.
“High VIX indicates rising risk in the market and being the cash base buying mentality among the investor, price of put option rises heavily,” said Taparia of Anand Rathi Financial Services.
Therefore the key question that now lingers is how one should position their portfolios to counter volatility?
“Volatility is a trader’s delight and hence a lot of opportunities come across. For participants with relatively less risk appetite we would suggest option strategies like straddle and strangle on the index. Option writing against holdings is also suggested provided the risk-returns are well understood. Talking about safe heaven sectors I would suggest FMCG and Pharma,” said Agrawal of Kotak Securities.
“At current levels we remain positive on select stocks in Oil and Gas, BFSI and Capital goods space and advice accumulating the same. Expect a lot of trading opportunities in this month,” he adds.
