India’s VIX index, which measures market volatility, posted its biggest decline in five years on Tuesday, closing near record lows. Analysts say that the price may increase in the market due to the continuation of the current government in the general elections. Easing geopolitical tensions after Israel’s relatively muted response to Iranian drone and missile strikes also likely led to a 19.7% decline in the index to 10.2.
This was the biggest adjustment since the declaration of the 17th Lok Sabha election results on May 23, 2019 and the 12th biggest single-day fall for the index since 2008. Unlike now, almost all major declines occurred primarily at advanced vixen levels.
“The last time there was such a sharp fall after the announcement of election results in 2014 and 2019, the number fell by around 34% and 30% on the day of the results,” said Apoorva Sheth, head of market prospects and research at SAMCO Securities.
Generally, the Indian vixen cools down after election results as uncertainty clears up. However, Seth said this time, the opposition’s poor performance could cost the BJP-led NDA a victory in the market.
The sudden drop in the Vix can also be attributed to the decline in option contract lots. Investors’ focus shifted to earnings this week amid geopolitical tensions and concerns that the Federal Reserve will delay cutting interest rates.
Also known as the fear gauge, the National Stock Exchange (NSE) calculates this index to gauge market expectations for near-term volatility and volatility. The index is calculated based on option prices. A low reading of the index suggests that traders are not expecting a big move in the market. Likewise, higher readings, which often indicate uncertainty among market participants ahead of major events such as election results or the federal budget.
Anand James, Chief Market Strategist, Geojit Financial Services said: “Theoretically, VIX paints a picture of expected volatility over the next 30 calendar days. Hence, the lower the vix, the more confident traders will be of continued growth. “
The lot size of Nifty option contracts has been reduced from 50 to 25 starting from the May expiry, which may increase liquidity and reduce the bid-ask spread of call and put options, which may reduce the fear index.
Some market participants said Tuesday’s sharp decline was unusual, even as the election was underway. They said this was due to an error in option pricing between the various strikes shown on Tuesday. Unlike the US, VIX is not traded in India. Therefore, Indian Vicks have nominal significance.
CBOE volatility index trading based on S&P 500 Index options is very popular in the US. Domestic exchanges are also lobbying market regulators to allow trading on VIX India.
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