Nifty traders perplexed as fear gauge index crashes 22%. Is that good or bad news?

“Such sharp falls in India VIX were last seen once the Lok Sabha election results were announced. In 2014 and 2019, it dropped by almost 34% and 30% on the day of results. Today’s drop is the biggest fall after these two falls,” said Apurva Seth of Samco Securities.

The barometer measures the market expectations of volatility over the next 30 days. So a lower VIX means low expectations of volatility and vice versa.

"Traders may be factoring in the fact that the geopolitical tensions will ease and that things are looking good on the domestic front. Vodafone Idea's FPO subscription numbers show that there is enough liquidity in the market and companies will get funds at a particular valuation even if there are financial issues," said Deepak Jasani of HDFC Securities.

So does India VIX indicate that traders are more confident about the ongoing upswing?

“Option traders react to such scenarios by reducing the expectation of premium expansion. But the suddenness of VIX’s fall today, especially when Nifty barely rose above 0.5%, needs to be factored in when acting on the VIX’s signal,” Anand James, Chief Market Strategist, .

One reason behind the rise in VIX could be NSE’s decision to reduce the lot size of Nifty derivative contracts to 25 from 50 from April 26.

“VIX is calculated on the basis of bid ask quotes of near as well as next month Nifty option contracts, and contracts expiring from 26th April onwards would be having a lot size of 25, half of what is in play now, which could have a role in bid asks getting tighter,” James pointed out.

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