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.

(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.

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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