Why Option Prices Spike Before Major Events: Understanding India VIX


Date: June 4, 2024 Event: India Election Results

That morning, the Nifty Index opened and suddenly fell -8%. Thousands of crores of rupees sank in a single day.

Now the question comes,  did the market know before this happened?

Yes. The VIX knew.

Before the Election Results, the India VIX had gone from 24 to 32. That is, the market was saying — "Something big is going to happen, we don't know, but the next few days will be very volatile."

Understanding this means understanding the VIX.

What exactly does the VIX measure?

derstand one important thing here —

VIX does not measure price. VIX measures uncertainty.

If you don't know whether an exam paper in school will be difficult or easy — you will study for a long time. That is uncertainty.

In the market, when traders do not know whether Nifty will go to 25000 or 22000 — then they take more precautions. And the measurement of that precaution is VIX.

NSE (National Stock Exchange) calculates VIX from the prices of Nifty Options. When the prices of Options increase significantly, VIX goes up.

What is an Option and where does Premium come from?


Let's take a practical example here.

There is a farmer in your village "Rambhau".

There are mangoes in Rambhau's field. Now in the month of May, mangoes are ₹100 per kg.

A trader comes and says, "Rambhau, I do not want to pay now. But I want the right that in 2 months I will buy your mangoes for ₹100 per kg."

Rambhau says, "Okay, but to get this right you have to pay ₹10 now."

This ₹10 is the Option Premium.

Now the important thing is —

If the rainfall is less that year (uncertainty is high, it is not known where the price of mango will go) — then Rambhau will ask for ₹25 premium instead of ₹10. Because its risk is high.

If the weather is absolutely fine (uncertainty is low) — then Rambhau will pay ₹5 premium.

This is the real story of VIX and Option Premium.

What exactly happens when VIX increases?


Now let's look at it from the perspective of an analyst.

When VIX is in the range of 12-15, the market says — "Everything is fine, there is no reason to panic." At such a time, the CE (Call Option) of Nifty 25000 — that is, the right to go above Nifty 25000 — can be obtained for perhaps ₹80-₹100.

But when the Budget is coming, the Election Results are coming, or there is a big event like War somewhere in the world — then VIX suddenly goes up to 25-30.

The same Nifty 25000 CE is now worth ₹200-₹300.

Why? Because the Option Seller knows that something big is going to happen next. His risk has increased. So he asks for a higher premium.

Where does the term "Implied Volatility" come from?


This is a bit subtle but important.

When you look at the price of an Option in the market, there is a secret hidden in that price — "How much movement is the market expected to make next?"

This secret is called Implied Volatility (IV).

Example: If the price of an Option is very high, the market is saying — "We think there will be a very big movement ahead."

IV is high → Options are expensive → VIX goes up. IV is low → Options are cheap → VIX goes down.

So VIX is a "mirror" of the prices of options — VIX shows what is seen in the options.

How do traders use it?

Option Buyer (who wants to buy the right):
This person buys Options when VIX is low. Because the premium is cheap. Then when VIX increases, the price of his Options increases — that is, he makes a profit.

Option Seller (who wants to sell the right):
This person sells Options when VIX is high. Because the premium is expensive. Then when VIX comes down, the price of those Options decreases — that is, he makes a profit.


India VIX is currently in the range of 13-14, which is a historically low zone. This means that the market is currently complacent — meaning traders are not afraid. At such times, Option Premiums are very low. But this can also be a sign of danger — because when the market is very calm, suddenly a big event happens and the VIX Spikes and those who have sold Options suffer huge losses.

When uncertainty increases in the world or in a country, people get scared, the demand for Options increases, their prices increase — and VIX captures all this in one number.