Downward consensus building in the VIX

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Traders continue to bet on lower volatility.

The CBOE volatility index, which measures the expected moves of the S&P 500, fell 3.8 percent to 14.26 -- its lowest close since June of 2007. It has fallen from levels above 35 since mid-November and above 45 since early October.

The big options trade was in the September VIX puts, where 15,000 of the 18 puts were bought for $0.72 and $0.73 and an equal number were sold at the 15 strike for $0.15. The volume at both strikes was well above open interest, so it was a new opening position.

Those contracts are tied to September futures contracts, which closed at 24.74, down 5.5 percent. They haven't traded for very long, but tested 30 on March 6, a day the spot VIX hit a high just above 21. Known as a call spread, the option trade cost $0.57 to $0.58, and will earn more than 400 percent if the VIX settles at or below 15 in September.

The trade matches a recent pattern of investors buying puts on the VIX, thinking that volatility premiums are not justified and that the futures will collapse. Of the VIX options, more than half were puts, which is unusual because investors normally buy calls on the instrument to hedge long positions in the S&P 500. The total VIX options volume was 677,000 contracts, more than twice the daily average over the last month.

The iPath S&P 500 VIX Short Term fund (NYSEArca:VXX) also traded a record 744,000 options, of which 484,000 were puts. See this related story for more.

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