Where has all the volatility gone? Lost in everyone’s extreme focus on the VIX, VIX Futures and other VIX related exchange-traded products is the fact that market realized volatility in the S&P is basically non-existent. Yesterday the S&P fell 0.50% marking the 8th consecutive session in which the market has closed within 0.50% of the previous day’s close. So far for 2012 markets have closed within 0.50% of the previous days close 73% of the time and has averaged a 0.41% absolute daily move which would roughly approximate a VIX of 6.5! 21-day realized volatility in the S&P is nearing multi-year lows, currently measuring in the 7-8% range.  Historically we’ve seen a meaningful uptick in volatility when realized volatility has reached these super low levels.

Investors, especially technology investors, have become increasingly cautious over the past few sessions, taking the time to protect recent gains by purchasing downside put spreads in the XLK and QQQ primarily out to April. The use of spreads in these trading strategies limits the amount of outright exposure to April implied volatility levels which when looking at them in comparison to recent realized volatility may appear expensive. April VIX futures closed yesterday at 24 vs. spot VIX of 18.43. A move up to the 24 range in the VIX would likely come as a result of a significant pullback in the markets and with 1Q calendar earnings season set to kick off in this time frame it may be prudent for investors to consider purchasing portfolio protection in April or out even further.

Options Block Events Calendar:

Significant earnings scheduled for Thursday include: Kroger (KR ), Foot Locker (FL ), Big Lots (BIG ) and Toronto Dominion (TD ). Key economic events today include Jobless Claims, ISM, and Auto Sales.

Significant Options Research:

Positioning For Near-Term Upside in Micron (MU)? The LiveVol blog published an article highlighting overwhelmingly bullish order flow in DRAM manufacturer Micron (MU) yesterday. Notable activity included traders purchasing 50k March 10 calls and April 11 calls vs. selling 14k April 9 puts. While MU earnings are not expected until after March expiration, the LiveVol team theorizes the potential reasoning behind this latest activity. You can check out the full article here: Micron Bullish Trading

 Video of the Day: Using VIX Options To Hedge Your Portfolio

In this video Dr. J discusses potential hedging strategies to employ to protect your portfolio using VIX options.

Source: Yahoo! Finance Breakout

Unusual Options Activity

PowerShares QQQ Trust (QQQ ) while trading at 11-year highs saw options activity dominated by near-term put buying. Specifically we saw traders rolling the March (regular expiration) 67-63 put spreads out to the March (quarterly expiration) 67-63 put spreads. The trader takes in a profit and gets additional time for the QQQ to trade below $63, at which point the spread takes maximum gains.

CBOE Volatility Index (VIX ) options were active yesterday with traders purchasing over 30k April 21/18 put spreads for $1.25. This spread was purchased yesterday as well over 11k times for $1.15. Clearly this trader sees April VIX futures falling significantly from current levels. April VIX futures closed yesterday at 24. Recall maximum profit on this April put spread is achieved with April VIX futures trading at 18 upon expiration. The same trader appears to have also purchased between 5k and 10k deep in the money April 30 puts in the VIX for $8.00.

Apple (AAPL ) weekly options were extremely active in early trading with traders purchasing weekly call options in the 540, 545, and 550 lines.  Shares of AAPL finished the day up 1.3% at 542.44.

Traders targeted June 28 calls in Intel (INTC ) yesterday, purchasing over 6k for roughly $0.77.  Most of the activity took place as the market turned lower yesterday, so traders were looking to take advantage of the pullback. The calls could generate major leverage if INTC pushes higher in coming months, but they could also expire worthless if it fail to rally or drops. INTC ended the session down 1.32 percent at $26.88. The stock has run higher since trading under $20 back in September, and yesterdays call buyers are looking for shares to reach levels not seen since late 2007.