Plotting Nifty IV ride.

Index IV’s generally shoot up on events like the coming budget for India. 

The current IV is at 29 levels, although not new high for the year but highest for last 6 months.

Plotting IV for Nifty shows a very peculiar pattern.

While the IV’s were declining from May highs of 34 to 52 week at 13 in September just when the Index short off to new highs. The IV’s then broke out of the falling trend line.

From September onwards they have been on a very different path. The initial rise was contributed by the perpetual writers getting caught off guard. After that the Nifty rose to high in early Nov and IV declined to below 20 levels. It is then the whole ride has been turbulent.

The decline from highs of early Nov led to rise in Nifty IV as no the fall off was sharp 7-8% of index.

What is worth mentioning was that the Options market was factoring in the Santa rally as the Nifty IV were declining from high of 23 on 12^th Dec to 15 by Dec end. The index rose by 4% during that period.

Declining IV shows complacency as the buyers are rushing in for protection.

The start of New Year 2011 has been one of the most tumultuous rides in index.

The Index declined 10% in Jan followed by another 3.5% decline in Feb. No wonder that the Nifty IV bounced from lower band at 15 and now at way above the upper band.

Once the Budget event is over one the Nifty IV can possibly cool down to mid band at 20 levels. But that depends a lot what is there in Budget.

So what in the options market betting on for Budget?

The current Nifty SKEW of move of 2.5% in index is at 3 Volatility points.