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VIX Closes Down Ahead of Quad Witching

Not only is tomorrow the last day of trading for September options contracts, it is also a Quadruple Witching Friday. Quad Witching means contracts for stock index futures, stock index options, stock options AND single stock futures all expire. This occurs on the third Friday of March, June, September and December. Expiration usually leads to greater volume and volatility, as players adjust or exercise their derivative positions.

We just about hit 10,600 on the Dow, but fell slightly short, as stocks struggled to find momentum all session. Clearly, investors don't have enough conviction in the future of the economy to break out of a tight trading range, as indicated by anemic volume and lack of direction. The Dow Jones Industrial Average ended up 22.10 points, or 0.21%, to close at 10,594. The S&P 500 lost 0.41 points, or 0.04%, to close at 1124, and the Nasdaq was up 1.93 points, or 0.08%, to finish at 2303. Utilities, energy, and industrials fell, while the technology and materials sectors rose.

The CBOE Volatility IndexI:VIX closed down $0.38, at 21.72, and call volume outpaced puts by four to one. VIX put volume of 45,000 contracts compares to call volume of 174,000, with the majority of call volume in out-of-the-money calls, suggesting hedging for large price movement into a historically volatile period.

The SPDR S&P 500 ETF (SPY) - Get SPDR S&P 500 ETF Trust Report closed down $0.03, at $113.05. SPY October put option implied volatility of 21, is below its four month average of 24. SPY September options were active as traders closed out positions. September 113 calls were the most active, with 100,000 contracts trading into September expiration on Friday. The September 112 straddle is priced at $1.11 and October at $4.90, indicating traders are pricing in a 0.9% move into September expiration.

The PowerShares QQQ Trust (QQQQ) closed up $0.19, at $47.94, but is bid up $0.22, at $48.16, in after-market trading on better-than-expected Oracle (ORCL) - Get Oracle Corporation Report and Research in Motion (RIMM) EPS. QQQQ October put option implied volatility is at 19, November is at 24 and December is at 25 versus its three-month average of 26, suggesting decreasing near-term price movement. QQQQ put option contracts of 330,000 compares to 266,000 calls, with October 48 puts active.

Not only is tomorrow the last day of trading for September options contracts, it is also a Quadruple Witching Friday. Quad Witching means contracts for stock index futures, stock index options, stock options AND single stock futures all expire. This occurs on the third Friday of March, June, September and December. Expiration usually leads to greater volume and volatility, as players adjust or exercise their derivative positions.

Economic data for Friday include: Consumer Price Index 8:30 a.m. EDT, Consumer Sentiment 9:55 a.m. EDT.

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