Reason behind impulsive fall in markets; India VIX gains 29 per cent, Nifty PE IVs jump over 50 per cent

The Indian markets have witnessed their worst single-day fall in percentage terms since late December 2020. Nifty has crashed more than 500 points while Sensex plummeted more than 1,700 points on Friday. The biggest thorn in the flesh, which saw the market crack impulsively, were the sudden rise in the domestic as well as the global bond yields and the airstrike launched by the US in Syria.    

The yield on 10-year bonds in India has moved up from the low of 5.88 on February 01 to a high of 6.24 on February 26. Bond yields are largely inversely proportional to equity returns. Therefore, when bond yields surge, equity market returns tend to fade.   

Barring Sun Pharma, which has gained a quarter of a per cent, all other stocks from Nifty 50 were trading in the red. Bank Nifty has witnessed a cut of nearly 5 per cent and it has slipped below the lows of February 24. Meanwhile, there has been a sudden abrupt rise in the fear gauge index- India VIX at it jumped nearly 29 per cent to move above the 29 levels. Considering the inverse relationship between Nifty and India VIX, it is prudent for the market participants to avoid excessive leverage positions on the long side and follow strict stop-losses for their open positions.    

Another point worth noting in today’s session is that Nifty Put implied volatility for March 04, 2021 expiry that has soared more than 50 per cent. Nifty’s 14,500 Put options IV spiked from 21 to 31.5 while 14,600 Put options IV spiked from 20 to 31. The out of the money (OTM) put option like 14,800 and 14,700 with this massive fall has turned into in the money (ITM) put option. And the price of 14,800 Put options along with 14,700 Put options has shot more than 600 per cent.