How Low Can Vol On the SPY Go?

Stocks closed at new multi-year highs Wednesday on positive jobs data ahead of the government's full December employment report on Friday and as commodities turned higher. We haven't seen the early January selloff many were waiting for, but Friday will provide a convenient excuse with the labor numbers. Have we seen enough evidence yet to believe any dip will occur without buying? It would be nice to see people move away from the sidelines and get involved after this week when the December and jobs data "wait-and-see" attitude goes away and volatility picks up as we trade into Q1 earnings.

The Dow Jones Industrial Average ended up 31.71 points, or 0.27%, to close at 11,722. The S&P 500 rose 6.36 points, or 0.50%, to close at 1276, and the NASDAQ was up 20.95 points, or 0.78%, to finish at 2702. Most key S&P sectors advanced, led by financials, consumer discretionary and telecom.

The dollar strengthened against a basket of currencies with the dollar index up by 1%. The benchmark 10-year Treasury note weakened 1 5/32, lifting the yield to 3.481%.

Commodities bounced off early lows with the February crude oil contract rising 1% to settle at $90.30 a barrel after the Energy Department reported a greater than expected drawdown in crude oil inventories. The February gold contract shed $5.10 to $1373.70 an ounce.

CBOE Volatility Index (VIX) institutional call spreaders were active on total volume of 545,000 contracts to closed down 2.07%, at $17.02. Calls were heavily traded on 319,000 contracts compared to 126,000 puts, with March 35 calls as the most active series on 27,400 contracts.

SPDR S&P 500 ETF (SPY) options sellers pushed volatility lower into the Friday jobs report. SPY closed up $0.66, at $127.64. January call option implied volatility at 13 and puts at 14, below its 26-week average of 22. Premium sellers have been winners and momentum traders are joining the friendly trend lower.

Can SPY call implied volatility continue to trade at these depressed levels? Let's see how things play out heading into the most important quarter of earnings season. Q1 tends to be the busiest because we look at Q4 and full-year results and dissect management's forward looking thoughts on Q1 and the new year. One thing is certain. Watch more than underlying stock direction and look at volatility and the other components of your options positions. Protect your 2010 gains!

PowerShares QQQ Trust (QQQQ) volatility continues to trend lower on more sellers than buyers. The Qs closed up $0.48, at $55.74. January call option implied volatility is at 16 and puts are at 17, compared to its 26-week average of 22. January and February 54 and 55 calls were active, suggesting traders have begun to adjust positions into January expiration.

Research in Motion (RIMM) calls were active on low volatility into 2011 CES. The BlackBerry maker closed up $2.82, at $61.92. Weekly January 60 and 62 calls were active, January 60 monthly were active on total call volume of 112,000 contracts compared to 41,000 puts. January call option implied volatility is at 34 and February is at 35, below its 26-week average of 44. Check out my OptionsProfits colleague Skip Raschke's call from this morning. Big contrarian recommendation and he nailed it.

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