Indian equity options pricing in expectations of stable election outcome

Nifty 50 options pricing: As national elections unfold in India, investors are exhibiting confidence in the country's stock market, with options pricing indicating minimal anticipation of major volatility, unlike in previous election cycles.

The Nifty 50 is currently trading at record-high levels, reflecting market optimism fuelled by surveys predicting a victory for the Bharatiya Janata Party (BJP) in the ongoing elections, scheduled from April 19 to June 4, with results due thereafter.

One month ahead of the election outcome, the implied volatility of a put option with a strike price 10 per cent below the current Nifty 50 Index level stands at 18 per cent-20 per cent on the National Stock Exchange. This figure contrasts sharply with the 28 per cent-30 per cent implied volatility observed at the same point in 2019, indicating a lesser cost for investors seeking protection against adverse election results.

Implied volatility serves as a crucial determinant in options pricing, with lower values suggesting heightened investor confidence regarding the event's outcome.

Vikas Pershad, Asian equities portfolio manager at M&G Investments, remarked, "I think there's a high level of confidence that there will be stability in the Prime Minister's office post the results declaration." He further noted that the subdued volatility reflects a sense of complacency regarding the election outcome, marking it as the least event-risk scenario in the past two decades.

However, historical precedents remind investors of potential uncertainties. The unexpected defeat of the BJP to the Indian National Congress in 2004 resulted in a sharp Nifty 50 decline of up to 18 per cent.

Frank Benzimra, head of Asia equity strategy at Societe Generale, cautioned that a change in leadership this year could trigger a short-term market correction akin to the 2004 scenario. Nevertheless, foreign investors are currently more focused on India's relatively expensive stock market than election outcomes.

As the elections progress, attention shifts from whether the BJP secures victory to the margin of victory. Opinion polls suggest that the BJP and its allies are poised to secure over 300 seats, comfortably exceeding the 272 required for Modi's reelection.

"I think if there were a number less materially less than 300, then that would be a huge shock to the market," highlighted M&G's Pershad.

(With Reuters inputs.)