February 28, 2024

In the November series, India VIX hit a low of around 8.4 amid a lack of major triggers in the markets.

NSE Nifty 50, Bank Nifty and other index option premiums have fallen since October with realised volatility, and are likely to remain subdued in the run up to 2024 general elections as the market factors in a higher certainty of stable government.

In October and November, the option premiums were very low, making it challenging for option writers to generate substantial profits. Amid a bull rally in December, the option premiums have risen somewhat with a gain in Vix, but will likely fall back to the prior levels, said Nandik Mallik, Chief Investment Officer of Avendus Capital Public Markets Alternate Strategies.

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On December 8, NSE Nifty 50 hit the 21,000 mark as the Reserve Bank of India held the repo rate steady at 6.5 percent.

Volatility is a key factor influencing options value. A lower VIX makes options cheaper, resulting in smaller premiums for options writers and making it challenging for them to secure significant profits. In the November series, India VIX hit a low of around 8.4 amid a lack of major triggers in the markets, with indices moving higher with positive momentum.

“Option prices have historically followed cycles, with periods of low premiums and low Volatility Index (VIX), followed by sudden spurts in option prices and VIX,” said Mallik.

Bank Nifty option prices far lower now than previous state election results period

“Bank Nifty At the Money (ATM) weekly Put options on December 10, 2018, a day before election results, were priced at around 1.4 percent of notional for December 13 expiry,” Mallik pointed out.

Compare that with the current prices. On Friday evening, Bank Nifty ATM Put option at 44,800 strike was trading at just Rs 257, a mere 0.57 percent of notional — about 60 percent lower than before.

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Option premiums going ahead, closer to general elections

Going ahead, as general elections near, option prices will likely remain low also due to better price discovery and decoupling from global equities. “Price discovery has improved as option volumes have swelled up,” Mallik said, adding, “The decoupling from global equities has further compressed market variation vis-a-vis global equities.”

India has shifted from being a high beta market to now being independent of the US markets. As recently as the year 2020, Indian indices would fall and rise much more than the move in the S&P 500 in the US. But since then, Nifty 50 has shown movement independent of S&P 500, even rising in the face of a fall in the US index.

Hence, “option premiums will remain low in months to come, and the most powerful manifestation of that will be seen in pricing—coming May should be nowhere close to what they were in May five seasons back,” says Mallik.

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