The India Volatility Index (VIX) has captured market attention by reaching a 9-month high, closing at 16 on Thursday. Often referred to as the fear index, VIX serves as a key indicator of expected market volatility in the coming days, and the recent uptick has left investors and analysts wondering about the implications for the broader financial landscape.
The steady climb of India VIX started in the last week of November, when it hovered around 11, signaling a notable increase in market uncertainty.
Why the Recent Surge in VIX?
One plausible explanation for the spike in VIX is the expiration of monthly options contracts. Analysts, including Dinesh Nagpal, a technical analyst, attribute the surge to heightened short covering by option sellers. Nagpal notes that the rise in VIX has led to a rapid increase in premiums, indicating a surge in market expectations for volatility. The breakout signal above 14.8 suggests a continuation of upward trends, prompting a closer examination of market movements in the coming days.
Options Premiums and VIX: A Circular Relationship
The rise in VIX often prompts market participants to buy options as a hedge against potential market turbulence. As more people engage in option buying, prices surge, compelling option sellers to demand higher compensation for the associated risks. This circular relationship between VIX and options premiums can create a feedback loop, influencing market dynamics.
Rohit Shrivastava, Founder and Market Analyst at Indiacharts, highlights the role of futures prices in this dynamic. The NIFTY futures to spot differential, currently at a record high of almost 200 points for the January series, contributes to the overall premium cost. Higher futures basis translates to increased premium costs, aligning with the rise in VIX.
What Does a High VIX Mean for the Market?
While a high VIX traditionally signals a potential correction in the markets, the current scenario showcases an interesting divergence. Both the VIX and the market are rising simultaneously, indicating excessive bullishness. Rohit Shrivastava describes this as a “bearish divergence,” suggesting that a reversal in the market could bring heightened volatility.
Milan Vaishnav, Founder of Gemstone Equity Research & Advisory Services, advises caution, noting that the market is becoming vulnerable to sharp profit-taking bouts. The potential for consolidation at higher levels or significant profit-taking raises concerns for investors.
Interpreting VIX Moves: Elections and Beyond
Dinesh Nagpal suggests that if the surge in VIX is linked to the expiry of monthly contracts, its impact may be short-lived, ending by the close of the day. However, if the upward trend continues, especially into the next day, investors may need to consider broader implications. With 2024 being an election year, Nagpal speculates that the market could be factoring in potential populist measures, urging vigilance if the VIX continues its ascent.
