F&O volumes plunge as VIX sinks to new low

MUMBAI: As market volatility, reflected in the NSE India VIX, trades near an all-time low of 12.9 per cent, derivatives market participants find it tough to execute trades with option prices showing little movement, making many F&O strategies futile.

The daily average F&O turnover has also dropped 33 per cent in September so far to 1.47 lakh crore, against a three-month daily average turnover of 2.20 lakh crore. Nifty options daily average turnover has also fallen 37 per cent during the month so far, indicating investor’s reluctance to participate in the markets, say analysts.

"The premiums in options have come down significantly as investors don't see any risk in markets in the near-to-medium term. Market participants have also become reluctant to hedge their cash portfolio in the absence of risk. All these factors have impacted derivative trading volumes," said Jitendra Panda, managing director and CEO, at Peerless Securities. The low volatility in markets can be attributed to growing confidence of investors in stock markets, as they bet on recovery of the Indian economy with improvement in corporate earnings in the coming quarters.

The first quarter (April-June) GDP growth numbers at 5.7 per cent released in August-end has been encouraging for market participants, as they see a strong turnaround in the economy.

"Investors have grown in confidence, expecting the bull market momentum to sustain. There's limited downside to the market and everybody's waiting for a mild correction to buy into the markets," added Panda.

India's consumer price inflation (CPI) for August is likely to edge lower to 7.80 per cent, from July's 7.96 per cent, according to the data which is expected to be released on Friday. And with international crude prices falling to $100 a barrel, inflationary expectations are likely to fall further, prompting the Reserve Bank of India (RBI) to cut interest rates, which can act as a big trigger for the equity markets, reckon analysts.

"As market volatility hits all-time low, it's getting difficult to execute F&O trading strategies, with option premiums showing little movement. Low volatility has hit trading volumes in derivatives market," said Ashish Chaturmohta, head technical & derivatives desk, Fortune Equity Brokers.

Moreover, the robust flows into equity markets from both domestic and foreign investors suggest that the bull market is here to stay. Mutual funds, since the beginning of this year, have invested Rs 24,298 crore into equity markets, while FIIs have pumped in .`83,771 crore, or $14 billion, over this period. This has driven short-sellers out of the market.

"Investors have become reluctant to build short positions in the market despite indices trading near record levels, which is an unusual situation, as NSE India VIX suggests that there's limited downside to the markets," said Bhavin Desai, equity derivatives analyst at Motilal Oswal. The highest Nifty put option open interest is seen at 8,000 strike with over 83.54 lakh shares, suggesting strong support levels for the markets.