Fear gauge surges on the Street

Implied volatility, a measure of how wild a ride investors expect to see in the near future, has hit levels not been seen in the last eight months.

In simpler language, that would mean the worst may not be over.
The volatility index or Vix, a ripoff of the Chicago Board Options Exchange index by the same acronym, the so-called ‘fear gauge’, touched 34.52 on Tuesday — a number last seen in the beginning of September 2009.

The index is based on the Nifty 50 index option prices.

The Sensex fell 447.07 points or 2.71% to close at 16,022.48 while the Nifty closed at 4806.75.

Volumes rose to Rs.1.65 lakh crore on the exchanges, one of the highest ever, with the futures and options segment contributing Rs 149,000 crore to the number.

“There is a lot of flight to hedge positions by investors but the cost of doing so by taking put options has risen substantially. These levels of implied volatility are usually seen around major events like the Union Budget,” said Jitendra Panda, senior vice-president at Motilal Oswal Financial Services.

“The rising implied volatility has also increased the cost of hedging their positions, though many investors are now looking to make money by shorting the market. There is a possiblity of further downside though we could see a rebound from 4700 levels,” said Monal Desai, head of institutional equities and derivatives at Prabhudas Lilladher.

Others suggest falls ranging from 5% to 10%.

A large amount of the volatility has been laid at the door of the crises in Europe and fears that sovereign defaults will affect nations such as Portugal, Ireland, Italy, Greece and Spain.

On Tuesday, a preliminary agreement for the merger of four Spanish savings banks was announced.

Global cues have been negative on account of fears of the Chinese economy overheating as well as North Korea’s threats of military action against South Korea.

“Investors have been losing money and the sentiment is not good. There has been a correction after every recovery, leaving most people confused and nervous,” said independent investment advisor SP Tulsian.

Meanwhile, the rupee too has been depreciating against the dollar due to a flight to safety among global investors.

The rupee has depreciated 6.32% to Rs.47.09 after hitting a recent high of Rs 44.29 on April 9.

The fundamental story in India remains robust, suggested experts.
India is trading at a 15.41 times its earnings for the next financial year which is in keeping with the longer term average of between 14-17 times.

“The fundamentals are sound and from a price to earnings perspective we are looking attractive,” said SP Tulsian.