Election Jitters? Why stock market's fear gauge VIX is behaving strangely

When VIX was at 14, everyone expected it to go high owing to the onset of polling and the elections. This was a trap as it fell close to 10 levels, making a lot of people exiting their positions in losses owing to falling premiums, Rahul Ghose, CEO, , said.

Typically, when India VIX is close to 10-12 range, it is considered low and a VIX level 20 or above, it is considered as high. A high VIX indicates a rise in fear and expectations of increased volatility ahead. If VIX goes down, become cheaper.

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Seen in isolation, the present levels of VIX is consistent with , which usually witnesses a rise in VIX when previous peaks are re-visited. “In early April 2024, when tested a new record peak, VIX was near 11, but now above 16, when we are again back in the vicinity of the record peak. Similarly, when in mid-January 2024, when we saw a new peak in Nifty, VIX was 13.78, but three weeks later when returned to the same peak, VIX would rise to the 15-16 region, where it remained for the rest of February,” said Anand James, Chief Market Strategist, .

What is raising eyebrows now is the steepness in the fall and rise of VIX in a small time frame.

While a lot can be explained in terms of historical trends, approach of , pre-election jitters, and even the liquidity impact on lot size reduction in Nifty, the recent swings are difficult to be fully attributed to, he said, adding that the strength of correlation in VIX and Nifty is low in the short term.

“The mean of straddles during the time period of Feb to Apr 2024 is 198 with a standard deviation of 23, while the straddle on Tuesday, 23rd April, when VIX fell 20% 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,” the analyst said.

Being a 5-week expiry, May month is likely to see sharp swings on either side leading to VIX touching 20 if not more over the next 3 weeks, experts opine.

“Historically, 5-week series see both-sided movements. Another very critical point that traders should notice is that the June options premiums are not falling even with market movements on opposite sides. This is another sign that the VIX bottom has been made from an election perspective and is heading towards 20,” Ghose said.

How to trade?

Volatility is likely to move higher as we move closer to 4th June when the Lok Sabha election results would be announced.

"High risk traders can benefit from rising volatility by entering a . Here you sell the weekly call or put options which generally have high IVs and buy the same strike call or put option in monthly expiry. This is a limited risk and limited reward strategy which can help you benefit from the rise in volatility," said Apurva Sheth of .

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)