VIX shows market betting on 300-pt Nifty swing on Dec 09

Anuj Singhal

The India Volatility Index (VIX) has gained 19 percent in the last four sessions. Normally, this would have meant the market had declined during this period. That is because the movements in VIX and the market are inversely co-related, more often than not.

But this time around, the Nifty has risen alongside VIX, gaining 2.4 percent in the last four sessions.

So what’s happening here?

The most obvious explanation is the fact that the market is looking at Sunday’s assembly election results as a binary event – something which can move the Nifty by 300 points or more, on either side. And traders are either taking guard, or trying to ride the swing with minimum risk.

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Anuj Singhal

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The biggest example of this was the rise in put option premiums of ‘out-of-money’ strikes like 5800 when the Nifty rallied nearly 50 points on Monday. Even yesterday, premiums for ‘at the money’ call and put options rose sharply.

A glance at the top strikes with highest Open Interest also reflects market expectations of a big move. Both 5500 Put and 6700 Call have very high Open Interest. Foreign institutional investors alone have net bought Rs 4,000 crore in Index options in last 3 days. While some of this is explained due to early series phenomenon where FIIs hedge their positions, this amount of Rs 4,000 crore is clearly staggering.

The 6200 straddle is trading at a premium of Rs 320, which again is very high. In fact after a long time I am seeing almost an Infosys kind of trade playing out on the Nifty.

And just for record, the last time the volatility saw this kind of spike actually led to the markets bottoming out in August. It will be interesting to note if this spike would be led by a topping out of market.