Options data indicates that markets will experience extreme volatility till a clear trend on election results emerges
Bets are still on the table on who will win the elections, but the aggressiveness seem to have tapered.
Exit poll results suggesting a clear majority for Narendra Modi led NDA seem to have calmed down the markets. This is visible in the sharp fall in volatility, measured as VIX and traded as a future contract called India VIX.
Vix touched a high of 38.96 on Monday, the day the exit polls were expected to be announced (they were announced post market).
Though the markets shot up on Tuesday, Vix settled back to the 30-32 range seen a fortnight before the exit polls were announced. On Thursday, just before the market closed, Vix rallied again to close near the day's high of 36.75.
This indicates that markets will remain volatile on the day of the results till a clear trend emerges before Vix started correcting itself and revert to the mean. In fact, open interest options data suggest a volatile election results day.
Firstly Vix is still at around 32 levels against a historic average of 23 since the start of data compilation by NSE. Vix has traded at an average of 20 for the last one year. This means that the move will be anything but average on the results day.
An idea of how high or how low the market can go can be seen from the open interest (open option position in the market) data of Nifty options.
There are traders who are betting on Nifty touching 8,500 levels which can be seen from the open interest of nearly 4 lakh in the Call contracts. Nifty presently trades at 7,100.
A 8,000 Call contract has seen a massive open interest of 56 lakh which is almost as high as a 59 lakh open interest for a 7,200 Call contract. A clear indication that a large number of investors are expecting the market to hit the upper circuit today.
Having said that there are enough who are expecting Nifty to hit the lower circuit too. Open interest at the 6,000 Put is 50 lakh while 5,500 strike is witnessing an open interest of 11 lakh contract.
Though the volatility has come down, bets on the table suggests trading in the markets might be halted for a short duration at least.
