India VIX jumps 72% from April lows; up 5% today. What's behind the surge?

India VIX, commonly referred to the gauge of volatility in the Indian stock markets, surged 5 per cent in intra-day deals on Tuesday, May 07 to hit the 17.56 mark – a 52-week high.

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.

On April 23, India VIX had dropped 20 per cent to 10.2 levels, which analysts attributed to the then prevailing positive sentiment in the domestic markets. Since then, India VIX has climbed steadily and surged over 72 per cent to hit the 17.56 mark in intra-day deals on Tuesday, May 07.

 

Analysts attribute this rise to nervousness ahead of the outcome of Lok Sabha elections on June 4, and expect India VIX to continue its journey north as the election outcome day nears.

That apart, the two key factors, according Santosh Meena, head of research at Swastika Investmart, are driving the VIX's rise since the past few trading sessions. 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.

“This rise aligns with historical trends, as the VIX typically climbs before major events like general elections. In 2019, it saw a 150 per cent jump (from 12 to 30), and in 2014, it spiked 212 per cent (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,” Meena said.

In early April 2024, when Nifty tested a new record peak, India VIX was near 11, but is now above 16, when the indices are again back in the vicinity of the record peak. Similarly, when in mid-January 2024, when the Nifty50 neared its peak levels, 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.

Perhaps the right way to decode this rise in India VIX, according Anand James, chief market strategist, Geojit Financial Services, is to acknowledge 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 February to April 2024 is 198 with a standard deviation of 23, while the straddle on Tuesday, April 23, when VIX fell 20 per cent 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 said.

Crucial support levels for the Nifty50 index that investors need to watch for are 22300, 22000, and 21700.

“For an upward trend to be established, a breakout above 22,800 is necessary,” Meena said.