VIX populi? Falling index points to complacency

Volatality Index
Gainers & losers
MUMBAI: India’s volatility index, VIX — a measure of investors’ perception about risk — is trading at its lowest level since November 2007, leading a section of market participants to think that investors could be getting complacent.

The India VIX touched an intra-day low of 15.8% before closing the day at 18% on Monday. It had risen to a high of 85% in November 2008, when the crisis in global financial markets intensified, following the bankruptcy of US investment bank Lehman Brothers. The index was trading around 30% levels as recent as May this year as concerns of sovereign debt default in the Eurozone, mounted.

“Our markets have had a fair bout of positive news flows which have kept the liquidity intact in the past few months as reflected in the FII inflows against the nervousness mood in global markets,” says Prakash Diwan, head-institutional business at Networth Stock Broking, on one of the reasons for the fall in VIX. He adds that volatility could rise over the next week, as the current derivatives settlement cycle draws to a close, but that may not be a cause for concern unless the situation in world markets worsens.

Many brokers are advising their clients to be selective in their derivatives bets, fearing a sharp move in the near term.

“Contrary to global trends, the Indian market has been hovering in a narrow band. This has made investors complacent as the market is finding strong support at current levels,” says Ravi Sharma from derivatives sales and research desk at Prabhudas Lilladher. “One can initiate long option strategies depending on the view on the markets,” he added.



Benchmark indices, the Nifty and the Sensex, have been moving in a narrow range for nearly 10 months now. At the same time, Chicago Board Option Exchange’s VIX (CBOE VIX) — the most-widely tracked volatility index — which measures the implied volatility of S&P 500 options, has been inching up of late. It closed at 26% on last Friday from 22% at the beginning of the month.

Some analysts believe that the India VIX may decline further in the short term. “Earnings season results in higher volatility as investors try to adjust their portfolios based on new financial numbers. This causes volatility and rise in volatility and VIX. Surprisingly, it has only gone down so far. With no major events likely to happen in the next few weeks, it could only fall further,” feels a senior derivatives dealer at a foreign broking firm.

But Mr Diwan advocates a more cautious approach. “It is prudent to sit on cash to the extent of around 8-10% and use volatility to take positions at lower, more profitable levels as in any momentum-driven market,” he says.