India VIX loses steam, volumes sink to less than Rs 1 crore

MUMBAI: After the pre-election frenzy, derivatives trading in India Volatility Index (VIX), better known as the ‘fear index’, is on the wane. The index, launched in India in February by the NSE, allows investors to hedge near-term volatility risk. India VIX indicates investors’ perception of near-term volatility.

A high VIX suggests that the market is expecting a higher volatility and viceverse. India VIX and Nifty have a negative correlation. The index clocked Rs 325 crore worth of trading volumes on the first day of its launch but lost steam in the past fortnight with trading volumes falling to less than Rs 1 crore.

In the past fortnight as few as five contracts of India VIX were traded in one of the sessions. The lot size of India VIX, aroundRs 10 lakh, is kept high to discourage retail investors from trading in a comparatively risky product. India VIX follows a weekly expiry cycle that experts say is the main reason driving away traders from the product.

"The fall in trading volumes in VIX was on the expected lines," said Sudip Bandyopadhyay, managing director and chief executive officer, Destimoney Securities. "VIX is considered as a good product but volumes may take a couple of years to build as more people will have to get used to it. Such was the case with options which took more than five years to pick-up."

India VIX in many ways is similar to the VIX index on the Chicago Board Options Exchange (CBOE) which owns the Rs Vix’ trademark. According to an NSE spokesperson, "The India VIX value has come down since the event (general elections) and there may have been a temporary impact on the volumes. We continue to put in a lot of effort on creating awareness about the benefits of the product among market participants."

"The two key reasons for the fall in VIX volumes could be lack of education among traders on its use and its short expiry cycle," said Vineet Bhatnagar, MD, Philip Capital. "VIX is aligned with Nifty index, which has a monthly and quarterly cycle. Traders taking position in VIX get to take an extremely short view after which positions need to be rolled over that may incur cost."

Bhatnagar points out that VIX futures have not seen much success in countries except in the US where they are aligned with the S&P index and their expiry is only 48 hours ahead of the expiry of the main index. This enables hedgers to take a view on volatility that can be aligned with the S&P.

Some perceive that volumes in VIX may surge closer to major events when the market turns volatile. Trading interest in a hedging tool like VIX has been mixed in other markets as well, with subdued activity in the S&P/ASX 200 VIX futures in Australia which launched in last October, and the Nikkei Volatility Index in the Osaka Stock Exchange launched in February 2012.

In the US, the May 2014 average daily volume and total monthly volume in futures on the CBOE VIX and total exchange-wide at CFE have fallen by 19 per cent.