Lust for lucre overrides fear factor as investors turn a blind eye to volatility index

Lust for lucre overrides fear factor as investors turn a blind eye to volatility index
19 Oct, 2008, 0237 hrs IST,Aman Dhall & Shobhana Chadha, ET Bureau
NEW DELHI: Did investors play with their own fate? Check this out. Even though the India Volatility Index (VIX) issued negative forecasts, investo

rs chose to turn a blind eye to the warning signals.
VIX or Fear Index, as it is better known, touched an intra-day high of 67.78 on October 10, an ominous sign that bulls could be further slaughtered over the next 30 days. In fact, in the US, the Chicago Board Options Exchange (CBOE) VIX reached 80 for the first time in its 18-year history on Thursday, signalling that the worst is yet to come for the world markets. Market analysts now unanimously agree that it won’t come as a big shock if Sensex even nosedives below 8,000 levels in the coming days.
For the uninitiated, the VIX measures the amount by which an underlying index is expected to fluctuate over the next 30 calendar days. If the volatility is above 30, then the market is said to be very fragile in nature. When above 40, one can expect uncertain market conditions and if the VIX is above 50, it can be dangerous. Here’s how it’s calculated. From the near and mid month options bid and offer prices of the Nifty 50 index options, it derives the implied or expected volatility over the next 30 calendar days.

A SundayET research reveals that investors could have easily dodged their losses of Rs 5.74 trillion incurred in the first fortnight of October on BSE Sensex and NSE Nifty, had they tracked the VIX journey diligently over the past one and a half month. The analysis (see chart) reveals a high degree of co-relation between major Sensex and Nifty falls this month and the VIX predictions in September.

For instance, when VIX was at its highest intra-day level (till now) of 68.33 on September 18, both Sensex and Nifty fell by over 6% on October 17. Similarly, on September 16, when the VIX recorded an intra-day high of 53.62, the repercussions were felt on the two major indices 30 days later on October 15, as they both dipped over 5%.
“It’s a wonderful attempt to educate investors about the VIX. I fully agree had retail investors tracked the VIX, they could have planned an effective entry and exit in stocks in such turbulent times. It’s high time that awareness about this index increases in India,” said HS Sidhu, executive director of Delhi Stock Exchange (DSE). Already, the market capitalisation of the 30-Sensex companies eroded by as much as Rs 3,10,093 crore in the first 15 days of October. The Nifty 50-companies, on the other hand, saw their wealth diminishing by Rs 2,64,548 crore during the first fortnight of October.

via: E.T