Stocks Bulls Losing Support as $4 Trillion of Options Set to Expire

Bulls reeling from the Federal Reserve’s still-hawkish tilt are about to lose a major force that helped tamp down turbulence in US stocks during this week’s macroeconomic drama.

An estimated $4 trillion of options is expected to expire Friday in a monthly event that in tends to add turbulence to the trading day. This time, with the S&P 500 stuck for weeks within 100 points of 4,000, the sheer volume provides a positioning reset that could turbocharge market moves. Given the brutal backdrop that emerged in recent days, from a raft of rate hikes by global central banks to signs the American economy is starting to flag, worries are mounting the expiration will act as an air pocket.

That’s how David Reidy, founder of First Growth Capital LLC, sees it playing out. In his view, the market has been mired in a “long gamma” state where options dealers need to go against the prevailing trend, buying stocks when they fall and vice versa.

Friday’s event “could break the tightness of the gamma exposure and lead to some dispersion, that is, room for the index to break out,” Reidy said. “That would be a downside move given yearend position adjustments and the macro recession view.”

Options tied to the 4,000 level on the S&P 500 account for the biggest chunk of open interest set to mature and acted as something of a tether for the index’s price in the weeks leading up to Friday, according to Brent Kochuba, founder of Spot Gamma.

Stocks were already under pressure Thursday as the European Central Bank joined the Fed in raising interest rates and warning of more pain to come. The S&P 500 sank 2.5%, closing below 3,900 for the first time in five weeks.