Election-related volatility index VIX rises to 17, experts predict it may surge much higher; avoid wearing skimpy shorts

Election-related volatility index VIX rises to 17, experts predict it may surge much higher; avoid wearing skimpy shorts

Trading at the critical resistance region of 16.50 to 17, a strong closure above this range has the potential to start a rapid VIX rise. The VIX may test the upper 19.50–20 and 22.75–23 levels above current levels.

The weighted average of the OTM puts and calls in the market is used to generate the India VIX, an indicator that represents the volatility of the Indian market.

On May 7, the volatility index VIX increased to 17, breaking over a critical resistance range of 16.5 to 17. This occurred as the Lok Sabha elections moved into the third round of voting. A strong closing above this level, according to experts, may indicate that the market is becoming more uneasy as the elections go on.

On May 6, the India VIX, which has been rising since April 24, celebrated its eighth day in a row of gains. The index has not reached this level since December 2022, a span of more than 17 months, when it reaches 17.

This unmistakable increasing trend points to a growing level of anxiety ahead of the results of the general elections—a pattern that is often seen before important events. As a result, it is anticipated that options prices would climb significantly as well, raising the cost of hedging, according to Jay Thakkar, ICICI Securities' Head of Derivative Research.

The levels 23 and 25 should be monitored if the VIX rises over 17, according to Thakkar, before the election results are announced on June 4. As long as it stays over 13, market volatility is likely to persist. Traders should use care when moving forward till the incident is over. As a rule, volatility substantially drops when the result is as expected. But there can be an even bigger rise if the results are surprisingly bad, Thakkar said.

In order to minimize hedging losses, he suggested hedging portfolios by buying put options rather than selling call options, and he cautioned traders against maintaining naked short positions in options while the VIX was increasing.

According to Tejas Shah, Vice President of Technical Research at JM Financial, the recent strong surge in the India VIX ahead of the elections, which is normal at such periods, indicates increasing concern. The VIX generally swings inversely to market developments.

Technically speaking, Shah said that the VIX is now in an uptrend and that the bias would be positive as long as it stays over 13.50. "Trading in the critical 16.50–17 resistance zone, a strong close above this range can set off a strong VIX rally." VIX may test the upper 19.50–20 and 22.75–23 levels above current levels.

Shah said that the NSE Nifty 50 benchmark index has psychological support near 22,000 and immediate support at 22,200–250 (the 50-day exponential moving average). From a positional standpoint, Nifty has significant support around the 21,700–800 mark, and a significant sell-off of 400–500 points is likely below there. "From a medium-term perspective, the bias remains positive as long as Nifty holds above these levels," he said.