Why a Low India VIX Can Be Dangerous for Option Buyers
When India VIX is low, options may look cheap. This can attract option buyers, especially beginners. But a cheap option can still lose money if NIFTY does not move much.
Let us understand why.
What Is India VIX?
India VIX gives us an idea of how much movement we may see in NIFTY. A high India VIX usually means bigger moves are expected in NIFTY, while a low India VIX usually means smaller moves are expected.
India VIX does not tell us whether NIFTY will go up or down. It only gives us an idea of how much NIFTY may move.
Why Can Low India VIX Be a Problem?
Suppose NIFTY is at 25,000 and you buy a call option because you think NIFTY will go up. NIFTY goes up to 25,030.
You were right about the direction, but NIFTY moved only 30 points. Because the move was small, your call option may not rise much. This can be a problem for option buyers when India VIX is low. NIFTY may move in the direction you expected, but not enough to give you a good profit.
Time Can Reduce the Option Price
Every option has an expiry date. As expiry comes closer, there is less time left for NIFTY to make the move you expected.
For example, you buy an option at ₹50. NIFTY does not move much, and the option falls to ₹42. If NIFTY continues to stay in a small range, the option price may keep falling as expiry comes closer. This is called time decay.
So, NIFTY does not always have to move against you for you to lose money. If NIFTY stays in a small range, your option price can still fall.
The Risk Can Be Higher Near Expiry
When expiry is close, there is less time left for NIFTY to make a bigger move. Suppose you buy an option at ₹30 near expiry. NIFTY stays in a small range, and the option falls to ₹20 and then ₹10.
If an OTM option expires without any value, its price can become zero. So, an option trading at ₹10, ₹20 or ₹30 is not low risk just because its price is low. You can still lose most or all of the money you paid for it.
Cheap Options May Make You Buy More Lots
When an option looks cheap, you may feel like buying more lots. Suppose an option that was trading at ₹80 is now available at ₹25. You may think about buying three or four lots because the price looks low.
But if you buy more lots, you also increase your option trading risk. So, do not decide the number of lots only by looking at the option price. First decide how much money you are willing to risk on the trade.
Be Careful With Cheap OTM Options
OTM means Out of the Money. OTM options are often cheaper, but NIFTY usually needs to make a bigger move for their price to rise enough.
Suppose you buy an OTM call option at ₹15. NIFTY goes up a little, but your option price does not rise much. This can happen when the move in NIFTY is too small.
So, do not buy an OTM option only because it is available at ₹10 or ₹15. Before buying, think about whether NIFTY can make a big enough move before expiry.
Can NIFTY Make a Big Move When India VIX Is Low?
Yes, it can. A low India VIX does not mean NIFTY cannot make a big move. News, global markets or an important event can suddenly cause a big move, but you do not know exactly when that move will happen.
You may buy an option today expecting a big move, but NIFTY may stay quiet for the next few hours or days. During this time, the option price may fall because expiry is getting closer. Even if NIFTY makes a bigger move later, the option may already have lost some of its value while you were waiting.
What Should a Beginner Check?
Do not buy an option only because it looks cheap. First, look at how NIFTY is moving. If NIFTY is making very small moves, be careful.
Also check how much time is left before expiry. When expiry is close, NIFTY has less time to make the move you expect. Be extra careful with cheap OTM options, and do not buy more lots only because the option price is low.
Most importantly, decide how much money you are willing to lose before entering the trade.
Final Thoughts
Low India VIX can make options look cheap, but a cheap option is not always a good option to buy. For an option buyer, getting the direction right is important, but NIFTY also needs to move enough before expiry.
This is especially important when expiry is close and when you are buying cheap OTM options. So, instead of asking only:
“Is this option cheap?”
Also ask:
“Can NIFTY move enough before this option expires?”
This simple question can help you avoid many unnecessary option trades.
A cheap option does not always mean a good opportunity. Before buying, think about whether NIFTY can move enough before expiry, and always keep your risk under control.
