What investors should know after Tuesday’s trading saw the India VIX drop by about 20%

In Tuesday’s trading, the NSE’s volatility indicator, India VIX, which is derived from the Nifty options order book, fell by as much as 20%. But in Wednesday’s trading, it bounced back and gained more than 2%.’

The market’s volatility index reached a low of 9.8 intraday before closing at 10.19 on Tuesday. Nonetheless, the Sensex closed with a gain of 89.83 points, or 0.12%, at 73,738.45, while the Nifty50 index finished 31.6 points, or 0.14 percent, higher at 22,368,.

A few elements that could have played a role in the downfall include the impending Lok Sabha elections, the anticipation of a strong mandate for the governing party, and the persistence of macroeconomic conditions at home.

The India VIX eventually breached a bear trendline that had held for around 3.7 years in late December 2023, according to Jigar S. Patel, Senior Manager – Technical Research, Anand Rathi Shares, and Stock Brokers. This signaled a major change in market mood. Before December 2023, the VIX failed to break above this trendline on many occasions. The India VIX saw a notable drop of about 19–20% during the most recent trading session—a level of reduction not seen in over five years.

Patel continued, saying that notable occasions, most notably the declaration of the results of the general election, were the previous times that such substantial declines in the India VIX were seen. For example, on the day the election results were announced, the VIX fell by around 34% and 30%, respectively, in 2014 and 2019.

When acting on the VIX’s signal, James, Chief Market Strategist at Geojit Financial Services, thinks that the abrupt decline in the VIX should be taken into consideration.

What is shown in India VIX?
In theory, the VIX shows the anticipated volatility over the following thirty days. Therefore, traders are more optimistic about the current upswing the lower the VIX. According to James of Geojit Financial Services, options traders also respond to similar circumstances by lowering the anticipation of premium increase.

He continued, saying that it is crucial to remember that VIX is determined using bid-ask quotations from both the current and upcoming Nifty option contracts. Contracts expiring after April 26 would have a lot size of 25, which is half of what is now in play, and this might contribute to bid asks being tighter.

A technical perspective
The India VIX is now trading close to a historical support level that ranges from 9 to 8, according to technical chart analysis. The Nifty, a benchmark index for the Indian equities market, is now trading in proximity to the 22450–22500 resistance zone. In light of this, Anand Rathi Shares and Stock Brokers’ Patel said, “We anticipate a correction of at least 200-250 points in the Nifty over the next few trading sessions, with the India VIX positioned near a support zone and the Nifty near resistance.”