VUCA

The header looks like a spelling error. But believe me it is not. It’s not just a correct term but rather something which is extremely relevant in the current situation. The term VUCA is acronym to Volatility, Uncertainty, Complexity and Ambiguity. None of the terms are such that, they don’t fit in current market situation.

This term was originally developed by US Army College to explain the situation post the end of cold war. Since then it has been used extensively by organizations and studies of behavioral impact.

The current situation pre Gujarat elections are all about these four factors.

Volatility: The volatility in terms realized volatility and options volatility both have increased over last few days. The event risk has lead to an increase in implied volatility. As for the underlying market, the moves have been stuck in a range but constantly hitting the upper and lower end. This is increasing the short term underlying volatility.

Uncertainty: The uncertainty around the event is keeping the market nervous. Such events are binary in nature. The best way to play such events is to have a view, position oneself and wait till the event is over. Finally, you earn or learn. But this reduces the participation and volumes in the market. So, the impact starts rising and pushes participants into compulsive action and that’s where mistakes occur.

Complexity: The complexity of the event comes from the fact that how many seats will be won by the incumbents. If the number is so less that they lose what would be the impact? if they win but with lower margins how the markets will react? and if they win strongly, then what?  What is priced in the market right now is difficult to gauge.

Ambiguity: The situation is ambiguous because post the results how would markets read it for 2019. There are more state elections like Rajasthan and Karnataka lined up. However, Gujarat being a strong hold for decades now has a symbolic representation. India, they way it is fragmented on various parameters, it is difficult to judge who will be come to power on what basis. Though for us, we wish economics and good sense prevails.

As for now, it is going to be these four factors around which markets will revolve. Come 18th December, the results will be out and these factors shall disappear. The path from unknown to known is the most the difficult to walk.

As for me I am positioned with my view; see you on the other side of the event.

Happy Trading.

Cheers!!!