22% ‘volatility crush’ on D-Street as exit polls scream Modi 3.0

D-Street fear index India VIX fell 22% to the day’s low of 19.12 on Monday after a screaming call by exit polls suggesting the return of the incumbent Bharatiya Janata Party (BJP) led NDA government. At 1:20 pm India Vix stood at 20.21, down by 17.85% from 24.60 on Friday.

According to the average of 12 exit polls, NDA is seen as winning 367 seats this time, improving its 353 count in the 2019 elections. Even the lowest forecast is that of 316 seats. While the NDA may fall short of its ambitious ‘Abki Baar 400 Paar’ target, traders see Nifty going beyond 24,000 this week.

While exit polls are estimates given by pollsters, actual results will be announced on Tuesday.

“The markets are riding a wave of optimism, propelled by the exit polls suggesting a decisive win for the NDA government, reflecting the sentiment driving the surge to an all-time high of 23,122,” Suman Bannerjee, CIO, Hedonova said.

The rally is likely to sustain if the NDA wins while any surprises might trigger volatility, Bannerjee cautioned.Sahaj Agarwal, Head of Derivatives Research at Kotak Securities expects a reduction in volatility, which in market parlance is called “volatility crush“. Typically, a market-impacting event leads to an irrational increase in implied volatilities (IVs) of options which primarily occurs due to the fear and uncertainty surrounding the event’s outcome, he reasoned.”High implied volatilities are attractive for option sellers and provide momentum for option buyers. The transition back to a low IV regime is often drastic, making risk management crucial. As the event progresses and certainty sets in, IVs collapse and return to normal levels,” Agarwal said.India VIX’s 52-week low stands at 8.20 and peaked to the 52-week high of 26.20 in the run-up to the final phase of polling and exit polls on June 1.

“The previous 15-month average for India VIX is observed at 13-15. Therefore, expect an IV crash and a sudden drop in options premiums, along with the impact of the underlying movement, referred to as delta,” Agrawal opined.

After the exit polls, it was expected that when markets resume trading on Monday, bulls will be unleashed. Headline index Nifty hit a fresh lifetime high of 23,338.70 gaining over 800 points while the S&P BSE Sensex soared by 2,778 scaling a new peak of 76,738.89.

Also Read: Exit Poll impact on D-Street! Religare Broking expert tells what to do with Naukri, DMart and 4 other stocks?

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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