India VIX jumps 15% as early counting shows mixed trends: Here’s how option prices reacted

As the vote counting commenced on Tuesday showing mixed trends in early reports, the market sold off sharply with the benchmark Nifty 50 hitting as low as 22,389.85 during the day, erasing all gains made on Monday.

As early figures showed reasonable numbers for the INDIA Bloc, volatility increased in the market with the India VIX shooting nearly 12% to hit as high as 26.37 on Tuesday. India VIX is an index that reflects the anticipated volatility in the market over the next 30 days.

Volatile Swings

India Vix has shown sharp swings in past two days as volatility hits peak on the election outcome for 2024. INDIA ViX plunged sharpely on Monday after election polls results indicated landslide victory for NDA. On Tuesday the India VIX again shot up nearly 15% as early election results show mixed trends.

In recent weeks, the index has been topping the levels of 24 as multiple sound bytes about election outcomes emanating from different corners appeared to be unsettling the markets. On Monday, the index had crashed nearly 19% as exit polls had predicted a landslide victory for the BJP-led NDA government.

Impact on options premium

With the rise in VIX, option prices have gained significantly. For instance, the Nifty Financial Service index which has its expiry on Tuesday fell 2.8% to trade at 21,959 at 10:18 a.m. A fall in the market increases the Put option prices and erodes the Call option premium.

Interestingly, the 22,000 Put option, which was an at-the-money strike at the time of writing, gained 204% with the fall in the index. At the same time, the 22,000 Call premium has eroded by just 68% at the time of writing.

Since the Nifty Fin Service closed near the 22,600 level on Monday, this strike presents an interesting example. Despite being an expiry day, the now out-of-the-money Call option at this strike has lost just 74% as of 10:22 a.m. despite a nearly 3% fall in the index. This shows the prevailing fear in the market with the vote counting in progress. The market is factoring in the risk premium of a volatile move which is why option prices are high.