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India VIX Behavior and Market Impact
The recent behavior of India VIX, also known as the fear index, has caused confusion among stock market traders ahead of the Lok Sabha elections. The volatility indicator saw a significant drop of over 20% to below the 10 mark on April 23, followed by a rise of over 60% in the next 8 trading sessions. This volatility has left many traders puzzled, with some experiencing losses due to the unexpected fluctuations.
Understanding India VIX Levels
When India VIX hovers around the 10-12 range, it is considered low, while a level of 20 or above is considered high. A high VIX indicates a rise in fear and expectations of increased volatility ahead, leading to cheaper option premiums. The current levels of VIX are consistent with historical trends, as previous peaks have been associated with a rise in VIX. However, the steepness of the recent fall and rise of VIX within a short time frame has raised concerns and is difficult to fully attribute to specific factors.
Anticipated Market Swings
Market experts anticipate that the upcoming 5-week expiry in May is likely to see sharp swings, potentially leading to VIX touching 20 or higher over the next 3 weeks. Traders are advised to be cautious and prepare for higher volatility as the Lok Sabha election results, expected on 4th June, approach. High-risk traders are suggested to consider a calendar spread strategy to benefit from rising volatility, as it provides a limited risk and limited reward approach to capitalize on the expected increase in volatility.
Uncertainty in the Stock Market
Overall, the unusual behavior of India VIX, the approaching Lok Sabha elections, and the impact of liquidity on Nifty’s lot size reduction have contributed to a climate of uncertainty and unpredictability in the stock market. Traders are advised to closely monitor VIX levels and consider appropriate strategies to navigate the potential impact of heightened volatility in the coming weeks.
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