VIX shows market betting on 600-pt Nifty swing on May 16

By | April 12, 2014
The India Volatility Index (VIX) has gained 28 percent in the last four sessions. Normally, this would have meant the market had declined during this period. That is because the movements in VIX and the market are inversely co-related, more often than not. But this time around, the Nifty has risen alongside VIX, gaining 3 percent in the last four sessions.
So what’s happening here?
The most obvious explanation is the fact that the market is looking at May 16 Lok Sabha election results as a binary event –  Narendra Modi coming to power thumbing Victory which can move the Nifty by 600 points or more. And traders are either taking guard, or trying to ride the swing with minimum risk.
The biggest example of this was the rise in Call  option premiums of ‘out-of-money’ strikes like 7200 which is trading with a Huge premium of 166 points Even Premiums for ‘at the money’ call and put options rose sharply.
A glance at the top strikes with highest Open Interest also reflects market expectations of a big move. Traders who wanted to Buy Option need to extreme caution as once the VIX comes down premium will erode significantly.
Foreign institutional investors alone have net bought Rs 5100 crore in Index options in last 10 days. While some of this is explained due to early  series phenomenon where FIIs hedge their positions, this amount of Rs 5,100 crore is clearly staggering. The 6900 straddle is trading at a premium of Rs 615, which again is very high.
In fact after a long time I am seeing almost an Infosys kind of trade playing out on the Nifty. And just for record, the last time the volatility saw this kind of spike actually led to the markets bottoming out in August. It will be interesting to note if this spike would be led by a topping out of market.

14 thoughts on “VIX shows market betting on 600-pt Nifty swing on May 16

  1. Johnson

    Dear Bramesh,

    Thank you for your prompt reply.

    However, I could not fully understand when you wrote that “will not take any trade in this”. What is exactly meant by this? The 11800/ 11900 Put Options are having buyers and sellers though the liquidity is low.
    Any advise on counter positions to the above situation.

    Would appreciate if you could answer…. at your convenience.

    Many thanks for your valuable cooperation.

    Best Rgds,

    Johnson

  2. Bramesh Post author

    Dear Johnson,

    Bank Nifty being a highly volatile instrument will not take any trade in this.

    Rgds,
    Bramesh

  3. Johnson

    Dear Bramesh,

    Reference to the VIX and the Market inclined towards a 600 point Nifty swing.

    Do you think it would be a good strategy to sell Put Options… especially the Bank Nifty Put Options a good 1000 points below (say selling the 11900/ 11800 Put Options) – given the present Bank Nifty hovering in the region of 12900. Given the high Premiums they are ruling at present… any rise around or near to the 16th of May… should see a rapid decrease of the premiums.

    To be on the safe side.. what kind of counter positions do you think should one take if one has sold Put Options at today’s rates.
    Your esteemed and valuable advise would be greatly appreciated.

    Thanks and Regards

  4. Ashwin

    Bramesh,

    Can you write an article on how to trade VIX futures, especially in May? Do you expect the VIX futures to fall after the results are announced or go up?

    Also, in vix futures, does the huge spreads between bid and ask prices bother you? How does one get around the issue?

    Ashwin

  5. Bramesh Post author

    Dear Hiren,

    We will analyze the price action during election period and decide the trades. Lets go step by step.

    Rgds,
    Bramesh

  6. Bramesh Post author

    Dear Prasant,

    I do not agree with your views. When whole world is talking about “Go Vegetarian” and it has been scientifically proven Veg is more good for health, My respect for Mr Modi grew many folds when he told to stop eating non veg.

    Yes such outlets should be banned as Animals are also living soul and as Human we have no right to kill them.

    Other things you are talking about are pending inquiry and truth will come out soon.

  7. Bramesh Post author

    Thanks for sharing your views. Appreciated !!

    Rgds,
    Bramesh

  8. saivenkat

    Dear Bramesh

    On 03.10.11, VIX soared to a high of 39.02 where nifty closed somewhere in 48++ zone.. bottomed out..

    On 26.08.13 Again it rose to 36.02.. here again nifty bottomed around

    5470 odd levels..

    At present VIX is at 29 lvls, nearly 5 to 8 times, since March 2011 Nifty has touched this level of VIX ( 29 lvls).. and with the present upmove,.. if VIX breaks out at 29 lvls..then we could see easily the levels of 34 odd..in which case.. nifty would have crossed 7200+

    Just my views..

    Regards
    Saivenkat

  9. Prasant

    he is full of double standards.. i think you have not seen the messages that he has posted for stop eating non vegetarian food and ban on such outlets.. leave along the fake encounter in which he transferred ias officer boss.. to top it all he was the leader to oppose GST, and now in his poll manifesto released it states of implementing the same.. first oppose and then show the light..

  10. Hiren

    Hi Bramesh,

    Yeah, the premiums for 7200 are too much (thought of buying that but could not bring myself to buy so high). What would you say if

    1. I bought the nearest strike price of straddle on 16th

    2. Short whatever rises on 19th

    3. Short puts untill 5th or 10th may and then squareoff before 16th

    Do you think any one of these or a combination would be good?

    Thanks
    Hiren

  11. Bramesh Post author

    Dear Prasant,

    What kind of religion divide and massacare you are talking about, He has ruled Gujarat for 12 years and not a single riot after 2002. We need to live in harmony and respect every religion, Listen to his interview on AAp ki Adalat you will see the clarity of thoughts he is having.

    Rgds,
    Bramesh

  12. Prasant

    Well sir,
    shorting has huge risks with limited gain and unlimited loss.. and with the Narendra Modi bubble around who knows whats in story.. If it bursts its the end of his political journey.. and the markets are just wary on his winning the election, discounting the religion divide and massacre his appointment will bring

  13. saravanan

    hi bhramesh,

    U made it valid point , options are huge premium in may series,Better to short options rather going long

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