Covid-19 impact: India VIX touches 86.63 level, breaches 2008 peaks

Topics India VIX | Coronavirus

According to experts, the peaking of volatility can be a lead indicator of the markets bottoming-out
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 global financial crisis in November 2008.

According to brokerages, unless volatility reduces, the markets are unlikely to see a bottoming out from the current sell-off.
“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 under a bear grip.

“The current implied volatility (IV) is not far from the record levels seen in 2008 financial crisis. On Tuesday, volatility levels continued to rise even as markets saw some recovery from lower levels, indicating bear grip over markets remains firm. Unless IV cools down, 500-600 point swings in the index cannot be ruled out,” said Chandan Taparia, head of derivatives and technical research at Motilal Oswal Financial Services.

On Tuesday, India VIX spiked by as much as 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 the IV moves to 100 zone, it would theoretically mean index can double or become zero,” said an analyst.

However, peaking of volatility can also drive markets towards their bottoms.

“After a shock, markets first become comfortable with the level of uncertainty (volatility), then with the level of price. We think that risk/reward for markets is improving. This remains a key unticked box on our checklist,” the report added.

The spike in volatility, combined with sharp daily swings, has forced futures and options to avoid risky strategies and look at hedging their bets.

“We are advising participants to stay calm and light at this historical decade-high volatility. For option traders, we are suggesting bear-put strategy to be with down trend. Simply buying options is not advisable as option premiums are much higher and can quickly meltdown from market swings in unfavourable scenario,” Taparia said.

According to analysts, writing or selling of options is also high-risk strategy that can trap traders in current conditions.

Market participants point out that the volatility seen in recent days amid the Coronavirus scare has been abnormal.

In year-to-date, the Nifty is down 35 per cent, while 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.

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