Indian Option Costs Drop as Bihar Vote Reduces Demand for Hedges

Updated on

The benchmark gauge of Indian equity-option prices fell the most in seven weeks, signaling reduced demand for protection against stock-market swings following the outcome of a local state election and U.S. employment report.

The India VIX Index dropped 12.5 percent to 17.04 at the close in Mumbai, its steepest loss since Sept. 18, after two weeks of advances. The cost of the Nifty Index call option with a strike price of 8,200, the most popular contract by open interest, slumped 70 percent to 15.50 rupees, according to data available at 4:39 p.m. in Mumbai. The 50-stock Nifty index sank 0.5 percent to 7,915.20, a fourth day of declines.

The defeat in Bihar state elections for Prime Minister Narendra Modi’s Bharatiya Janata Party follows a loss in Delhi elections earlier this year, and shows he can’t bank on winning control of the upper house of the parliament, where lawmakers appointed by India’s 29 states have blocked the government’s measures including a national sales tax. Increased odds that the Federal Reserve will raise benchmark U.S. rates at its December meeting after Friday’s payrolls data also weighed on the Indian markets.

“Options prices are falling as the uncertainty over Bihar elections and U.S. jobs data is over,” and it’s expected that the Fed will start raising rates in “baby steps,” Anita Gandhi, director at Arihant Capital Markets Ltd., said in a phone interview in Mumbai. “Election results have given a wake-up call to the government to start implementing ground-level reforms.”

The win by Modi’s opponents in India’s third-most-populous state gives them political momentum, and means that to get legislation passed in parliament until his term ends in 2019, he will need help from his political adversaries.

The cost of Nifty 7,800 put options, the most popular, tumbled 36 percent to 48.35 rupees. The number of outstanding Nifty index puts climbed to 803,425 contracts from 790,808 on Friday, while open interest in calls climbed to 994,252 from 950,202. Nifty futures for November delivery dropped 0.5 percent to 7,937.95.