Volatility gauge VIX jumps to 17 amid elections; experts say could rise more, avoid naked shorts

India VIX is the index indicating the Indian market’s volatility, calculated by using the weighted average of the OTM puts and calls in the market.

Volatility index VIX rose to 17 on May 7, entering a crucial resistance zone of 16.5 to 17 as Lok Sabha elections entered into the third phase of voting. Experts said a decisive close above this range could mean market is getting increasingly nervous as elections progress.

India VIX has been climbing since April 24, marking its eighth consecutive day of increases on May 6. Reaching 17 marks the first time the index has hit this level since December 2022, a period of over 17 months.

“This clear upward trend suggests a rising fear ahead of the General Elections outcome, a pattern often observed preceding significant events. Consequently, options prices are also expected to increase substantially, leading to a rise in hedging costs,” explained Jay Thakkar, Head of Derivative Research at ICICI Securities.

Thakkar said that if VIX surpasses 17, the next levels to watch are 23 and 25, anticipated before election result day (June 4). “As long as it remains above 13, one can expect continued market volatility. Traders should proceed with caution until the event concludes. Generally, volatility decreases sharply if the outcome aligns with expectations. However, if the outcome is unexpectedly negative, there could be a further sharp increase,” Thakkar added.

He advised traders against holding naked short positions in options when VIX is rising, and recommended hedging portfolios by purchasing put options instead of selling call options to minimise hedging losses.

Tejas Shah, Vice President of Technical Research at JM Financial, said that India VIX, which typically moves inversely to market trends, shows increased fear with its recent sharp rise ahead of the elections, a common occurrence during such times.

On the technical side, Shah indicated that VIX is currently in an uptrend and as long as it holds above 13.50, the bias remains positive. “Trading around the crucial resistance zone of 16.50 to 17, a decisive close above this range can trigger a sharp rally in VIX. Above these levels, VIX could test 19.50-20 and 22.75-23 levels on the higher side.”

Regarding the NSE Nifty 50, Shah said that the benchmark index has immediate support around 22,200-250 (50-day exponential moving average), with psychological support at the 22,000 mark. Positionally, Nifty has major support around 21,700-800 levels, below which a sharp sell-off of 400-500 points can be expected. “As long as Nifty holds above these levels, the bias remains positive from a medium-term perspective,” he said.

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