INDIA VIX BREACHES 2008 PEAKS
India VIX touched 86.63, higher than its historic closing peak of 85.13 in November 2008.
India VIX, which is also called the fear index, touched 86.63 on Tuesday, higher than its historic closing peak of 85.13 it reached during the 2008 global financial crisis.
According to brokerages, unless volatility reduces, the markets are unlikely to see the current sell-off bottoming out. “We think volatility needs to stabilise before the broader markets can heal. There is a precedent for this. In 2008, 2011, 2015 and 2018, equity volatility peaked well ahead of the ultimate low,” Morgan Stanley said in a note.
Market participants say such high levels of implied volatility indicate the markets are firmly in a bear grip.
“Current implied volatility is not far from the record levels seen in 2008 financial crisis. On Tuesday, volatility levels continued to rise even as the markets saw some recovery from lower levels, indicating a bear grip over the markets. Unless implied volatility cools, 500to 600-point swings in the index cannot be ruled out,” said Chandan Taparia, head of derivatives and technical research, Motilal Oswal Financial Services.
On Tuesday, India VIX spiked by 20 per cent before closing 13.8 per cent higher at 81.9. The all-time high for India VIX in intra-day trading is 92.53, which was touched in November 2008. “If implied volatility moves to the 100 zone, it would theoretically mean the index can double or become zero,” said an analyst.
However, the peaking of volatility can also drive the markets towards their bottom. “After a shock, the markets first become comfortable with the l evel of uncertainty (volatility), then with the level of price. We think that risk/reward for the markets is improving . This remains a key unticked box on our checklist,” the note added.
The spike in volatility, combined with sharp daily swings, has forced futures and options traders to avoid risky strategies and look at hedging their bets.
“We are advising participants to stay calm and light at this historic, decade-high volatility. For options traders, we are suggesting a bear-put strategy to be with downtrends. Simply buying options is not advisable because option premiums are much higher and can quickly melt down with market swings in an unfavourable scenario,” Taparia said.
According to analysts, writing or selling options is also a high-risk strategy that can trap traders in current conditions.
Market participants say the volatility seen in recent days amid the coronavirus scare has been abnormal. Year-to-date, the Nifty is down 35 per cent, while the Sensex is down 37 per cent. In the same period, India VIX has seen a jump of over 600 per cent. Over the last five years, India VIX has been traded at average levels of 15. However, there is a case for volatility to see some moderation.
“We see case for volatility to moderate, and position for a peak in implied volatility at these levels. First, markets now imply levels of volatility that have rarely, if ever, been realised over a 1- or three-month horizon, even in the global financial crisis,” the Morgan Stanley note said.