Anticipation in the India VIX Futures Market

A couple of weeks ago I was talking VIX to a completely new crowd in Delhi, Kolkata, and Mumbai India. The National Stock Exchange of India launched futures trading based on the India VIX (NVIX Futures) recently and I had the opportunity to meet with a wide variety of traders and investors to discuss how volatility futures markets act relative to the corresponding spot volatility index.   My visit was timely for a couple of reasons. First NVIX trading was relatively new so there were many questions regarding strategies and price behavior. The other factor relates to how the markets had been acting over the past few weeks in India as the country was in the midst of a significant national election.

The NVIX futures market actually has weekly expirations even though the underlying index is a 30 day volatility measure. The implied volatility of options on the Nifty Fifty (the underlying market for the India VIX) was at a relatively high level and the NVIX futures contracts were also at a high level. However, during my visit the first NVIX future that was going to expire after the election results were announced began trading. Since then another contract that expires after the election is being actively traded. The result a couple of days ago was the pricing curve below.

India VIX Curve

Before experienced volatility traders freak out at the spot index quoted at 3200 be aware than the futures are quoted at price level 100 times the underlying index – 3200 means the India VIX is at 32. More significant on this chart is the big drop between the May 13 and May 20 futures prices. The market is expecting much lower IV after the election results. This is a case of market volatility being more anticipatory than is the norm. We saw this sort of behavior in the US markets due to multiple deadlines that the government set in 2013. Also, we are starting to see similar behavior in VXST futures contracts since their launch a couple of months ago.

As far as volatility trading goes in India I think after the week, as long as the transition is smooth, that NVIX trading will probably switch over to the contango shape that more seasoned volatility futures markets are used to. At least until the market begins to anticipate the next big event like an election or major economic number.

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Russell Rhoads, CFA

CBOE Options Institute

Russell Rhoads, CFA, is a Senior Instructor with the Options Institute at the Chicago Board Options Exchange. He joined the Institute in 2008 after a career as an investment analyst and trader with a variety of firms including Highland Capital Management, Caldwell & Orkin Investment Counsel, TradeLink Securities and…