Since yesterday, the traders in India are witnessing huge fluctuation in India VIX and probably were concerned about what is happening and why it is happening?
Let us understand that India VIX is short is volatility indicator and is dependent on below 3 primary factors:
- Time to expiry
- Interest rate
- Index future level (sometimes compared with spot price)
- Bid-Ask spread/levels of OTM options of the index
3 factors that are contributing to high fluctuation in the last 2 days are:
- The consistent difference in SPOT and FUTURE price which is not tenable for long periods and increases fear among the traders and investors
- Bid-ask variation in OTM calls since month-end expiry is approaching. Many big players strike rotate and roll over their positions. This leads to pressure build-up in Bid-ask and leads to fear
- This one is an important and hidden factor that leads to indecisive VIX calculation. It is the de-sync between NIFTY and BANKNIFTY that raises fear factor among the traders of NIFTY
This is not new to see huge fluctuation in India VIX. It has been observed previously also. However, the outcome of such fluctuation is not favourable. We can expect an increase in price randomness and fluctuation. This is quite an issue with small-time option writers. Thus all trades need to be timed and managed cautiously.
Sachin Bhatia Equity Research – Read risk disclosure and disclaimer. Trading or investing in financial instruments involve high risk.