Volatility gauge India VIX, also known as Fear Index, surged to as much as 15 percent on May 6 to 16.58, prompting experts to advise caution against large leveraged positions. The rise in the VIX is a sharp rebound from the five-month low of 9.85 recorded on April 23. The volatility typically increases during general elections.
Experts have suggested not to panic, but they also recommend reducing highly leveraged positions and utilising hedges to manage volatility effectively. A further rise in the VIX index may trigger short term bearishness, said Avdhut Bagkar, Derivatives and Technical Analyst at StoxBox.
“A high VIX confirms weakness in the broader trend, as option data reveals addition in PE (put options). The highest open interest was seen in calls of Nifty 50, which were utilised for the writing side,” said Bagkar. He said that the technical setup shows profit booking conditions on the Nifty index.
Nifty trading range
Avani Bhatt, Senior Vice President of Derivative Research at JM Financial, suggested watching 22,000-23,000 trading range for Nifty, at the ends of which, traders can add or pare positions. From a broader perspective, the Nifty is expected to trade within a range of 22,000-23,000. Any movement below 22,000 presents a good opportunity to start adding quality stocks to the portfolio, while any movement above 23,000 suggests it's time to consider taking some profits off the table, she said.
“Within this broader range, be prepared for frequent gap openings and wild intraday swings on either side for the remainder of the month,” Bhatt said.
As for the VIX, Bhatt didn’t seem overly worried, as regardless of the market direction, the VIX has historically risen to at least above 22-24 level ahead of elections. “The current surge in the VIX from 11 to over 16 levels does not necessarily indicate significant corrections,” she said.
Caution for option writers
“A word of caution for option writers: It is prudent to hedge overnight option writing positions by buying out-of-the-money (OTM) options. It is advisable to avoid naked option writing entirely until the election outcome is announced and the market regains stability in price movements,” Bhatt added.
Sudeep Shah, DVP and Head of technical and derivative research at SBI Securities said: “As we are barely a month away from the election results, the rise in volatility is on expected lines. Till VIX holds 13-13.50 levels, it could head up to 20-22 levels in the coming few weeks. However, it is not a reason to panic and one should not link this rise in VIX with an expectation of correction but it definitely would mean sharp moves intraday as well as gap openings on either side in the coming few sessions.”
Also read:Sharp movements in Vix ahead of elections: Here's expert interpretation
"This implies the necessity of proper position sizing, managing the leveraged positions with efficient risk-management techniques including using hedging of positions as well as maintaining tighter stop losses in case the view goes wrong,” Shah advised.
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