DECEMBER Hang Seng index futures slumped in morning trading yesterday amid persistent overseas selling. The contract closed 120 points off at 9,865, a premium over the cash of just seven points. January futures fell 110 points to 9,925, a premium over the cash of 67 points. Turnover was a modest 16,213 contracts, with 14,200 in December and 2,000 in January as roll-over activity picked up. In index options, Jardine Fleming said: 'In December and January, premium sellers sold out-of-the-money options. 'Volatility sellers who speculated for a further decline in volatility in the coming weeks sold December 10,000 straddles.' There were 2,579 lots traded in the index variety of options while 830 lots in HSBC, 2,918 lots in Cheung Kong and 264 lots in Swire Pacific were traded. Premium sellers are investors who do not believe there is going to be a rise in volatility. They sell options on the basis they believe they will not be exercised. They will count a gain on the income received on the back of the sales. A straddle is where an investor buys or sells at-the-money puts and calls. A buyer believes volatility ahead is about to rise and sellers believe it is either going to remain stable or fall. Implied volatility continues to collapse to historically low levels. Yesterday it was about 15.75 per cent at the close. The lowest it has been in the week was 15 per cent. This kind of implied volatility level really does believe that a significant number of active investors in the options in the period believe the market is going to be dead. The 100-day historic Hang Seng index volatility level stands about 13.5 per cent, another historically low level. There appears to be a big discrepancy between sentiment in the options and sentiment in futures. Large long positions have been built up in December and January on the basis a Lunar New Year rally is due to emerge. In the options, investors have been locking in gains, taking out insurance and betting on flat times or consolidation ahead. Next week the Federal Open Market Committee meeting is set to be the big event as a decision is set to be made on whether to cut the fed funds rate.