A year after their introduction on the National Stock Exchange (NSE) India VIX futures are yet to see consistent participation. Market observers say that while lower liquidity is keeping institutional players at bay, the trading activity may deepen over a period as Indian investors start to comprehend the product better.
While their launch in February last year was deemed a right move, with the underlying market volatility on a rise ahead of the general elections, after July 2014 the volumes on VIX futures have dropped substantially. Compared to an average of R1,050 in the first four months of its launch, the aggregate turnover on VIX futures stood at R17 crore since November 2014. The average trading volume for the mentioned time periods has dropped from 6,610 contracts to 143 contracts.
The lack of strong volumes have kept away many interested market participants from using the VIX futures in their portfolio, including certain alternate investment funds (long-short funds) that are allowed to use derivatives products by the market regulator.
“We are keen to consider participating in the segment once the liquidity in VIX futures increases,”said Vaibhav Sanghavi, MD, Ambit Investment Advisors citing Ambit’s Alpha fund with R200 crore of assets under management.
Besides a moderation in market volatility in the second half of 2014, market observers attribute the lower trading interest in the product to its contract specification, including the size of the contract as well as the weekly settlement cycle.
“While the contract size is substantially large, traders are also not enthused to roll over their positions in VIX futures every week given that all futures and options contracts have monthly expiry,”said a derivatives trader at a domestic brokerage.
However, there is also this view that given the complexity of the product, the lot size of VIX futures act as a required entry barrier.
According to a derivatives analyst with a leading broking house, there is a tendency among a section of the retail investors to try newer products where the margin requirement is less especially during a bullish run. “ So, the contract size for VIX future ensures that the space does not get crowded by investors who just want to make quick money but do not understand the complexity of the product,”added the analyst. Market observers also point out that shorter trade cycle is inline with the nature of volatility trade where in positions build up closer to an event and are squared off immediately after the event.
At the time of their launch NSE cited good demand for weekly derivative products in the equity segment. The exchange announced introduction of VIX futures with effect from February 26,2013with three weekly futures contracts on India VIX expiring every Tuesday available for trading.
The minimum contract value at the time of its launch was fixed at R10 lakh and the margin requirement was set near 20%. According to the contract specifications shared on the exchange website, the lot size for the contract at 550 assigns the contract size to be around 11 lakh.
India VIX is the volatility index based on option prices of the Nifty index and represents the expected market volatility over the next 30 calender days. It is derived by using a computation methodology provided by Chicago Board Options Exchange (CBOE). NSE introduced the index in late 2007 through its licensing agreement with S&P.
