Correction Ahead As VIX Surges? Here's Everything You Need To Know About India's Fear Index Right Now

The India Volatility Index (VIX) continued its ascent on Thursday, after hitting a nine-month high of 16 on Wednesday. The index had reached around 11 in the last week of November.

Widely regarded as the “fear index” in market terminology, VIX indicates the expected market volatility in the upcoming days, with a higher reading suggesting an anticipated increase in volatility.

The recent surge in VIX is attributed to the expiry of monthly options contracts. Analysts have highlighted the spike in short covering by option sellers over the last two days. The increasing VIX leads to a rapid rise in premiums, creating an environment of heightened market volatility.

As investors brace for potential turbulence, the VIX’s recent breakout above 14.8 signals a continuation of upward momentum.

Why Has VIX Risen Sharply Recently?

The primary reason behind the sharp rise in VIX is linked to the expiry of monthly options contracts. The surge in short covering by option sellers has contributed to the rapid increase in premiums, driven by the ascending VIX. Traders and market participants closely monitor this trend to gauge the potential impact on market dynamics.

Does High VIX Signal an Impending Market Correction?

While a rising VIX often indicates an expectation of increased market volatility, analysts note a unique situation where both VIX and the market are rising simultaneously. This scenario suggests excessive bullishness among market participants.

Investor Considerations Amid VIX Surge

The market becomes vulnerable to sharp profit-taking bouts from higher levels when the VIX rises too high. Investors should be mindful of potential market consolidation or sharp corrections at elevated levels.

They should monitor the impact of the expiry of monthly contracts on VIX. If the Index continues to rise in the subsequent days, especially in an election year, it could signify broader concerns and impact the market.

Continuous VIX ascent could elevate caution, with potential levels reaching 18 or 19 in such a scenario.

As the market navigates heightened volatility, investors should stay vigilant and adapt their strategies to the evolving market conditions.