Options expiration could clear path for US stock market volatility rise

By Saqib Iqbal Ahmed

NEW YORK, Jan 16 (Reuters) – Friday’s monthly options expiration is likely to expose U.S. stocks to greater swings in either direction in coming days, potentially boosting market volatility from historically low levels, according to options market experts.

Options offer investors the right to buy or sell stock at a fixed price by a fixed date in the future called the expiration date. While large options expirations happen monthly, this month’s is being particularly closely watched by market participants as stocks are near highs and have been rangebound. 

The S&P 500 is hovering close to 7,000, a level which would mark a fresh record high.

Ten-day volatility for the S&P 500 – a gauge of how much stocks have swung in either direction – recently slumped to 8.1% on Thursday, close to the lowest it has been over the last year and about half its average level reading of 17.0% for the last 52 weeks, according to a Reuters analysis of LSEG data.

That’s helped push traders’ expectations for stock volatility to one-year lows.

“I think this options expiration will allow the S&P 500 to start moving around a bit more,” said Brent Kochuba, founder of options analytics service SpotGamma.    

One reason for the market’s apparent lethargy is traders selling call options on the broad index while buying volatility in single stock contracts. This trade garners momentum headed into corporate earnings seasons when investors bet earnings announcements will spur idiosyncratic stock movements while the broader index remains relatively calm. 

Such selling of index options tends to drive down volatility, keeping market moves in check.

“What we’ve seen is when you get into the 7,000 level more call sellers step up in the S&P 500,” Kochuba said. 

Selling call options leaves options dealers what is called “net long gamma” in market parlance. The dealers then must sell stock futures when equities rally and buy futures when markets sell off, all in an effort to keep their own position neutral.

“Because they’re buying dips and selling rips … that keeps us just locked in a range,” Kochuba said.

That volatility-suppressing force could ease following Friday’s expiration. 

Historically, the week after options expiration has seen stocks log larger than usual moves. Over the last year, on average, for the week after monthly options expiration, the benchmark index has moved 2%, in either direction, compared with an average weekly move of 1.5% for all weeks, a Reuters analysis showed.

VOLATILITY CATALYSTS

Investors will also face a slew of potentially market-moving catalysts in coming days, including a potential Supreme Court decision on the legality of the Trump administration’s tariffs, the January Federal Reserve meeting and further developments in the recently unveiled U.S. Justice Department investigation of Federal Reserve Chair Jerome Powell.

More than the index options, expiration of single stock options blocks was worth watching as a catalyst for increased stock swings in either direction, Mike Khouw, strategist at YieldMax ETFs, said.

For some individual stocks, a significant portion of open contracts will expire on Friday – as much as a quarter of all open contracts for options market favorites Nvidia and Tesla.

“(That is where) I suspect options are probably going to weigh more heavily on the price action of the underlying asset,” Khouw said.

(Reporting by Saqib Iqbal Ahmed; editing by Megan Davies and Franklin Paul)