Market fear gauge VIX sees sharpest fall in 5 yrs before change in Nifty

The fall in fear gauge India VIX by 20%, the most in almost five years, on Tuesday, is a onetime adjustment ahead of the lot size of the Nifty being halved to 25 shares after the current monthly expiry of Nifty futures and options contracts on Thursday.

VIX tends to rise when uncertainty increases and falls when it reduces.

All contracts—weekly, monthly, quarterly and halfyearly—from Friday will be available with the revised lot size of 25 shares.

Market mavens like Jimeet Modi of Samco Securities said the lower lot size will lead to a halving of margins (to trade) to ₹90,000 a lot from ₹1.8 lakh for traders of futures contracts and sellers of options contracts. “This could result in increased volumes by participants and narrowing bid-ask (buy-sell) spreads. As VIX is calculated based on index options’ bid-ask spreads, the narrowing spreads will result in lower VIX levels,” said Modi.

“The reduction in lot sizes is a key factor behind the falling VIX,” said Kranthi Bathini, director of Equity Strategy at

Wealth Mills Securities. “This, combined with a market tightness, particularly at higher levels, suggests potential exhaustion, further contributing to the lower volatility reading.”

Index options are a hit among retail, high networth individuals and proprietary traders. In notional terms, index options volumes account for 98.4% of the ₹79,928 trillion notional turnover of derivatives contracts on NSE.

The share of prop traders was 59.6% of gross notional turno-ver in April-February

FY24, foll-owed by individual investors (26.3%), foreign investors (5.9%), corporates (3.8%), DIIs

(0.1%) and others (4.3%).

Current level of India VIX stands at 10.27 against the oneyear average of 12.44.

The Nifty lot value is kept within ₹5-10 lakh. Whenever, the value exceeds ₹10 lakh— the April contract lot was worth ₹11.2 lakh—NSE revises the lot size so that the contract stays in ₹5-10 lakh band.

“Further, due to geopolitical uncertainties, investors are adopting a wait-andwatch approach, which might be another reason for the subdued volatility,” Bathini said.

“VIX depicts the volatility expectation for the next 30 calendar days. So, lower the VIX the more confident the traders are about the ongoing upswing. Option traders also react to such scenarios by reducing expectation of premium expansion,” said Anand James, chief market strategist, Geojit Financial Services.

“VIX is calculated on the basis of bid ask quotes of near as well as next month Nifty option contracts, and contracts expiring from 26 April onwards will be having a lot size of 25, half of what is in play now, which could have a role in bid asks getting tighter,” James said.

All contracts— weekly, monthly, quarterly and half-yearly—from Friday will be available with the revised lot size