The index closed at 9.84 on Wednesday, down 2.23%, below its previous record closing level of 9.88 seen in September this year. NSE’s Nifty fell 0.2% to close at 25,818.55, while BSE’s Sensex declined 0.1% to end at 84,559.65 on Wednesday.
A fall in VIX indicates that market participants expect lower volatility in the near term. It means investors anticipate smaller price swings in the index over the next 30 days, reflecting a period of trading in a tighter band rather than sharp moves.
“The primary driver behind the decline has been a sustained contraction in realised volatility,” said Dhupesh Dhameja, derivatives analyst at Samco Securities. Realised volatility captures how much prices have actually fluctuated recently.
AgenciesDhameja said over the past few weeks, benchmark indices have largely traded within a narrow band, marked by smaller daily ranges, fewer gap openings and quick recoveries from intraday declines.
The VIX typically declines when markets lack clear direction and major triggers. The index is down over 16% in the past month, while the Nifty has declined 0.75% during this period. When daily price movements are muted and there are no imminent events, investors see less need to hedge against downside risks. For downside protection, traders buy put options to protect portfolios against a fall in the index.
“Investors and traders are not aggressively buying Nifty put options, and there is no rush to hedge portfolios against a sharp fall,” said Dhameja. “Option buyers are comfortable taking risks without paying for a safety margin, resulting in a gradual compression in option premiums and implied volatility.” VIX and option premiums – the price of options – tend to move in the same direction because both are driven by expectations of volatility in the market. The VIX captures implied volatility, which forms a crucial part of how option premiums are priced.
Rahul Sharma, head – Technical and Derivative Research at JM Financial Services, said the decline in the VIX indicates that options traders are paying lower premiums.
“Of the three key scheduled events in December, the RBI policy and the Fed meeting are behind us, while the Bank of Japan’s rate decision on Friday is largely priced in. With FIIs maintaining short positions and retail investors staying long, market conviction remains weak and overall sentiment is neutral,” he said.
Sharma said the lack of clear directional movement has weighed on intra-day options trading profitability, leading to a decline in derivatives participation.
The 20-day average volume of Nifty futures stands at 5.55 million contracts, but volumes have remained below this level for the past seven sessions, with 3.61 million contracts traded on Wednesday.
“International volatility indicators remain stable, curbing cross-market hedging demand from institutional investors and keeping India’s volatility risk premium subdued,” said Dhameja.
What next?
Sharma expects VIX levels to remain muted through December before picking up in the new year. “From around January 10, as third-quarter earnings announcements begin, option premiums are likely to pick up, potentially improving profitability for derivatives traders,” he said.
Rajesh Palviya, head of Technical and Derivatives Research at Axis Securities, will watch to see whether the 25,700 level on the Nifty is sustained.
“The Nifty 50 could see some pullbacks as long as it is trading above the 25,700 level, and below it the index could slip further,” said Palviya.
Traders tend to be uncomfortable with extremely low VIX readings as they are also seen as a contrarian signal.
