Chicago Board Options Exchange’s (CBOE’s) volatility index, Vix, also known as the fear index, is close to its lowest levels since June 2007.

It’s not that investors have nothing to fear. On the contrary, there’s much to be worried about—the European crisis isn’t resolved, there are renewed concerns about the debt of the US, now referred to as a fiscal cliff, China’s economic slowdown seems to be worsening. And to add to all this, there is the uncertainty related to the US presidential election, which is just a few months away.

A file photo of NSE Mumbai

Option traders may be playing with fire, but they seem to be betting that even if the above-mentioned fear factors wreak havoc in the markets, it won’t happen in the next couple of months.

Prajakta Patil/Mint

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Options traders in India, too, are betting markets will be range-bound in the near-term, with the India Vix hovering around 16. Past experience shows it’s best to take a contrarian view when the index is at such low levels. The index has risen by as much as 50-60% in about a month’s time on the handful of occasions it has slipped below the 20-levels.

In end-April, for instance, the India Vix fell under 18, but recovered to the 22-23 levels by mid-May and then rose to more than 27 on 23 May. In end-December 2010, the index hovered around 17, but rose to around 25 by early February 2011. At times, the index has stayed low for a slightly longer period, but never more than two months. In June and July 2011, for instance, the index hovered between 17 and 20 for most part, before it jumped to the 30-35 levels in mid-August.

This time around, as well, the index has been below 20 for about two months now—since end-June, to be precise. Going by past experience, it makes sense to buy the India Vix. Unfortunately, there’s no way to do that since the Securities and Exchange Board of India hasn’t yet given permission for the launch of India Vix futures, despite having talked about it over three years ago.

Sophisticated proprietary traders and institutional investors can still find ways to take a long volatility position by dynamically hedging their options positions with offsetting positions in the futures market. But even other investors can take advantage of the record low levels of the volatility index. Buying insurance for a portfolio will rarely get cheaper.

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