August 25, 2015

The message in the NSE VIX

The National Stock Exchange’s India Vix’s 64.35% jump on Monday was the highest ever, based on data on the exchange’s website.

Its counterpart in the US, the CBOE VIX index, also known as the fear index, had jumped by 46.5% on Friday. It would be an understatement to say that fear has gripped traders in markets across the globe. NSE’s website doesn’t have data prior to March 2009; it’s likely that volatility was far higher in September and October 2008, at the peak of the Lehman crisis.

The India Vix index currently stands at 28.13, about half its peak of 56.07 in May 2009, around the time of the election results’ announcement. Still, the fact that the index has jumped so sharply in such quick time reflects panic. In the past six trading sessions, the index has risen by 52.67%. In other words, traders are jittery and buying protection using the options market, which started becoming more expensive from last week itself.

Before that, traders seemed fairly sanguine. For most of July and August, the index had hovered between 14 and 16. But now there appears to be hardly any respite. While the markets had stabilized around 11 am after the impact of margin calls wore off, selling pressure has sustained after the European markets opened lower later in the day. It’s not without reason that options sellers are demanding a far higher premium now than they were until a week ago.

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