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Tuesday, August 27, 2013

Using Volatility to Trade India!

The India VIX today is 28.71
 
Returns Up 92% on YTD basis.Up 54% on 6 months basis.
 
For those who are unfamiliar with this term India VIX is a volatility index based on the NIFTY Index Option prices. From the best bid-ask prices of NIFTY Options contracts, a volatility figure (%) is calculated which indicates the expected market volatility over the next 30 calendar days
 
Let me add that the India VIX has been at its highest since  5 December 2012.In the meantime the Nifty has gone from 5600 to 6100 without making a new high and then the break below 5700 that changed the trend.
 
 
What is interesting in the co relation between the VIX and Nifty is the fact that whenever the VIX has touched 28-30 ,the nifty either bottomed or it created a panic to drive 35-38 level where the Nifty needs a 5-6 month bottoming out period with bouts of huge volatility.
 
Patient traders will get opportunities to buy underpriced stocks of good companies in sectors that can rideout the slowdown.Neither is there any euphoria to give a 30-40% bounce back a la 2008 nor are there huge leveraged positions in the market to create major panic hence my assessment of couple of Quarters of bottoming out period.
 
What is clear is that the markets are in a downtrend and the derivatives players can look to go short n any 50-70 point bounce in the Nifty.Midcap banks with steady asset quality have been hammered so badly that an 8-10% rebound is likely.However,their valuation in the Banknifty is limited so do not expect the Index to perform.
 
Use the implied volatility indicator i.e.VIX to guage the direction and trend in the market and trade."The Trend is Your Friend" is an of quoted phrase across the Globe.This is the time to make use of it...!!
 
Amazingly the value buy reccomendation made in an earlier post in stocks like Tata Steel,Tata Global,ONGC are still in profit despite the market crash.Keep investing!