Instability has been increasing before elections in the last few years; Why and what does it mean for traders

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Expectations of market volatility ahead of elections – as measured by implied volatility (IV) – have already been rising over the past few years. A high IV suggests that the market expects significant price fluctuations, while a low IV suggests the opposite. Furthermore, the higher the IV, the more options.

In 2014, IV began to increase 22 days before the election; In 2019, it was 35 days earlier. This year, the rise started in late February, just 55 days before the election results.

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Chart showing year-to-date change in IVP. Source: QuantsApp

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Chart showing the slow and steady increase in implied volatility for the Nifty 50 index ahead of the elections. Source: Bloomberg

What has changed is that the increase in IV has become less rapid.

This can be seen from the historical implied volatility percentage (IVP) data. It measures the number of days that the current IV has exceeded the IV of those corresponding days, divided by the total number of days observed (ideally 250).

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Volatility has been making headlines recently, especially with investors pulling out cash after the India VIX rose from a low of 10 on April 24 to 18 on May 9. Since then, the Nifty has fallen from its high of over 22,700 to the May 9 level. 21,900.

The question is: How does this slow but steady increase, rather than a sudden spike in IV, affect the options market?

1. Anomalous trader, this term is for people who want to profit from short-term market inefficiencies without getting big profits by buying options. When IV is high, options are more expensive because large fluctuations in prices are more likely to occur, which can lead to larger profits (or losses) for option holders.

2. Since people are getting ready for the event (election), the increase in IV (implied volatility) due to the event is not very large. The effects of the event are being factored into prices ahead of time.

3. A slow and steady increase in IV bodes well for option writers, as the premium remains stable and the chances of sudden negative surprises are low.

“For the last 2-3 years, we have seen the Ivy growth trend becoming lower than before,” derivatives trader Santosh Pasi told Moneycontrol.

“The lower volatility is because we currently have more options sellers in the market, with lower margin requirements for spreads and more algo-based trading. Hopefully, this will increase as we move towards counting day.”

Pasi is navigating the current market by using credit spread and event strategies to be deployed.

The market's prediction about fluctuations in a security's price is known as implied volatility. IV is often used for pricing option contracts where higher implied volatility leads to higher premiums for options and vice versa. The primary influencing factors for estimating implied volatility are supply and demand and floating price.

Disclaimer: The views and investment tips expressed by investment experts on are their own and not those of the website or its management. advises users to check with certified experts before taking any investment decisions.

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