Stock traders’ fear gauge rises 12.8%: What does it mean

North Korea’s nuclear test has acted as a fresh jolt to the market. Mumbai: The local fear gauge, volatility index or India Vix, jumped the most in over nine months on Monday as escalation in geopolitical tensions surrounding North Korea after the country’s nuclear test sparked risk-off sentiment across global markets.

The index -a measure of traders’ expectations of near-term risks in the market -ended up 12.8% to end at 13.17 on Monday-its biggest one-day gain since November 15, 2016 as the benchmark indices fell 0.6% mirroring the weakness globally . During the day , it rose as much as 19.5% to hit a high of 13.96.

Derivative analysts said the volatility index could rise up to 15 if tensions surrounding the Korean peninsula escalate further.

The war of words between US and North Korea has made market participants wake up to possible risks, which is markedly different from the situation in the market in the first seven months of the current year, when volatility had been largely trending down.

All the risks -be it weak GDP growth data or tepid earnings growth -have been ignored as liquidity from the domestic institutions has been strong. North Korea’s nuclear test has acted as a fresh jolt to the market.

“The market has been in an extended period of complacency but we feel that September could see sharper selloff than what is being expected. I don’t rule out 15 levels being tested on the Vix.On the Nifty , 9,700 could be tested and if that fails to hold, the fall can extend to 9400,“ said Sanjiv Bhasin, executive VP-market and corporate affairs at IIFL.

Amit Gupta, head of derivatives at ICICIdirect said selling pressure in the market may increase if the Vix surpasses and sustains above 14. “For Vix, 14 is a crucial level. If it is able to sustain above 14, selling pressure will increase and the Nifty will then move to 9,750,“ said Gupta.

That the level of complacency has reduced can be ascertained from the 50% jump in India Vix from the record low of 8.73 hit on June 23. “Enquiries from HNIs for hedging have increased after the market fell last month from 10,100 to 9,700. This was not seen when the market was continuously rising. But, due to sharp correction in many midand large-cap counters in that fall, HNIs are now taking hedge as an insurance of their portfolio to some extent,“ said Jay Purohit, technical and derivatives ana lyst at Centrum Broking.

On Monday, the 9700 strike saw the highest increase in open interest among put options, followed by the 9600 strike. The 10000 strike continues to hold maximum open interest among call options, indicating that crossing the level would be a tough task for the index in the near term.

As uncertainty surrounding North Korea remains, some in the market advise moving to safer havens. Bhasin of IIFL advises buying gold ETFs and selling Bank Nifty futures.

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