Volatility as well as the expectations of future volatility have come off after the spike in late July and August this year. It does appear, however, that the Indian markets are unduly sanguine about their expectations of the future volatility.
Global markets had fallen sharply in late July on concerns about the impasse in Washington over the US debt. The S&P 500 index fell by around 17% between 21 July and 5 August this year. After being rangebound for about two months, the index then recouped most of those losses. The CBOE Volatility Index, too, has come off from levels of around 45 in early October to current levels of 31.
(Top L to R)- Bhanubhai Faujdar, Former BSE Director, Alok Churiwala, BSE Member, Uttam Bagri, BSE Director; (Bottom L) Madhu Kannan, MD & CEO of BSE and Ashish Chauhan, deputy director of BSE celebrate as the BSE’s derivative volume crossed 1000 crore mark in Mumbai on Tuesday. PTI
The Indian markets witnessed similar gyrations during this period. The India Vix index was under 20 before the fall in the markets in July. It then shot up to 35 by mid-August and remained high until early October, before coming off. It’s currently at 25.
But what’s interesting is that during this period, i.e. since end-July, the volatility measures in the Indian markets have been consistently lower than developed markets. In early August, the difference was nearly as high as 40%, and just last Friday it was at over 30%. The difference currently is around 20%, with the India Vix closing at 25 on Wednesday, compared with CBOE Vix’s Tuesday close of 31.
It’s not that the India Vix has never gone below its US equivalent, but considering that emerging markets are generally more volatile, it is an unusual occurrence. Especially so, since the trend has continued for nearly four months. Clearly, Indian traders’ expectations of volatility are running lower vis-à-vis US traders. Is there reason to believe that US markets are now more risky compared with the Indian markets? Perhaps so, but at the same time, the Indian markets will fall equally sharply if there is a correction in the developed markets.
Keeping this in mind, options sellers may well be setting themselves up for a rude surprise. A global shock will cause volatility to spike and lead to large losses on their positions.
Graphic by Sandeep Bhatnagar/Mint
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