Up and away? The market’s fear gauge is at recent low

With bad news factored in, the market’s fear gauge has receded to a two-and-a-half-month low.

The India Vix, a volatility index based on the Nifty Index Option prices, which indicates the expected market volatility over next 30 calendar days, has slipped below 20% levels in the last two trading sessions.

The last time we were here was on January 6 this year.

“Inflation, interest rate hikes and the tensions in the Middle East have been discounted for the moment, which has led to the drop in volatility and bargain hunting,” said Jitendra Panda, senior vice-president, Motilal Oswal Securities.

The Sensex started its downtrend from 20,000 levels on January 7, when it corrected by 2.44%. The India Vix, conversely, jumped 14.4% on that day.

A slew of negative news later meant the barometer touched 29.05% on February 25.

After the Union Budget three days later, investors started engaging in value buying, which spurred consolidation and a decline in Vix.
With expiry for March F&O contracts approaching, those betting on a fall started to cover their shorts, which augmented the upmove over last few days.

“Liquidity seems to be returning with foreign investors buying heavily both in cash and index futures. We have seen put option selling at 5400-5600 levels along with call unwinding at 5600-5700 levels. This has caused implied volatilities or IVs of options to fall from 27-28 levels to 20 levels,” said Siddarth Bhamre, head derivatives at Angel Broking.

The Nifty on Friday gained 2.4% to close at 5654.25, while the Sensex rose 464.90 points to close at 18815.64.

Even on global front, the Chicago Board Options Exchange Vix, which is the fear gauge in the US, has fallen sharply over the last 7 days on easing concerns regarding impact of the Japanese earthquake and tensions in the Middle East.

On Friday, it ended at 17.91,dropping almost 40% from its March 15 close of 29.40 — the biggest decline in the same number of days since November 2008.

Experts see the India Vix remaining around current levels.
“There has been trend reversal in IVs after they reached closer to 27 levels and have since fallen significantly in last 3-4 sessions. We expect it to cool off a bit further, which may support the markets,” said  Ketan Karkhanis, vice president, active trader services, at ICICI Securities.

“The upside bias may continue for some time and the resistance of 5700 is not going to hold. There may be a bit of volatility due to expiry but we are advising people not to short,” said Angel’s Bhamre.