Unexpected decline in India Volatility Index indicates improvements ahead
In an unexpected turn of events, the volatility gauge India Vix witnessed a significant drop of 19% on April 23, settling at 10.26. This plunge brings the Vix close to its lowest levels observed in the past five months. Traders interpret this decline as a potential signal indicating an imminent correction in the upcoming trading sessions.
Understanding Vix and Market Sentiment
Vix, often referred to as the fear index, serves as a barometer of traders’ expectations based on option prices. It reflects the anticipated percentage change in the underlying index, such as the Nifty, over the next 30 days, as inferred from bets placed in the options market. While a decrease in Vix typically correlates with a reduction in perceived market risk, a substantial drop at elevated market levels may signify traders’ preparation for profit-taking activities, possibly triggering a price correction.
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Market Analysis
The last time Vix touched the 10 mark was on September 15, coinciding with the Nifty’s proximity to its all-time high levels of around 20,200. Subsequently, until September 29, 2023, the Nifty experienced a decline to approximately 19,600 levels. Against this backdrop, experts caution that Vix’s descent to 10, particularly as the Nifty approaches the critical resistance band of 22,400-22,450, raises concerns for the near-term market outlook.
Arun Kumar Mantri, founder of Mantri Finmart, emphasizes the significance of Vix’s sudden decline in proximity to key resistance levels. He advises traders to exercise caution, suggesting the lightening of positions in the short term and the implementation of appropriate hedging strategies to mitigate risk in the upcoming trading sessions.
Nifty Option Chain Analysis
Analyzing the Nifty Option chain reveals notable open interest (OI) additions at the 22,400 straddle. The straddle strategy, involving simultaneous purchase or sale of both put and call options at the same strike price and expiry date, indicates potential market expectations within a specified range. Currently priced at around Rs 205, the 22,400 straddle suggests a range of Rs 22,200 to Rs 22,600 for the April series expiry.
JM Financial observes a trend of call position accumulation at the 22,400 strike, implying a potential cooling off in the market. Accordingly, they recommend considering Nifty purchases only above the 22,430 level.
Expert Insights and Future Outlook
Arun Kumar Mantri highlights Vix’s approach to medium-term support levels, suggesting the possibility of increased volatility and a reversal in trend. As the mid-phase of Union elections looms and global volatility remains a pertinent concern, market dynamics could experience significant shifts in the coming sessions.
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