Friday's $6.5 trillion notional options expiry stock poised to stir markets

Traders across Wall Street are preparing for $6.5 trillion in options contracts expiring this Friday, an event that could snap the market out of the flat, low-energy pattern it’s been stuck in since May.

This expiration covers a pile of different exchange-traded contracts, all scheduled to close out at once. That timing, which happens four times a year, is what some traders call “triple witching.” The actual expiry day isn’t expected to blow things up immediately, but once those contracts clear, the door is wide open for stocks to start moving again.

All this comes after a long stretch of quiet trading days where price changes have been pretty small. Rocky Fishman, who runs the analytics firm Asym 500 LLC, said this stability came from a “pinning” effect created by bearish options trades placed earlier in the year. 

“Pinning” means prices often stick near the strike price of heavily traded contracts as expiration nears. Rocky said those bearish trades were made when the S&P 500 still looked far from recovering. Back then, a bounce back to all-time highs seemed like a fantasy.

Dealers manage exposure to keep volatility low

During the drama around tariffs earlier this year, a bunch of investors went defensive. They bought downside protection—basically betting stocks would fall—and paid for that by selling call options around the 6,000 level on the S&P 500. That level felt unreachable at the time. 

“People might have seen a 6,000 level as something that’s really hard to get to as we were dealing with a lot of the tariff drama over the last few months, and therefore sold calls in the 6,000 range as a way of funding protection at various points,” Rocky said in a client note.

This whole setup impacted the way brokers and market makers had to hedge. Rocky said dealer hedging likely played a big role in keeping volatility low. The market has been in what’s called a “positive gamma” state. In that setup, dealers are usually forced to sell stocks when they go up and buy when they go down.

That process absorbs volatility instead of feeding it. Which is why stocks have been boring lately, even with the Middle East situation and nonstop tariff fights in the background.

But this wasn’t always the case. Back in early April, when the tariff story was blowing up, gamma flipped negative. That meant dealers were doing the opposite: selling into drops and buying into rallies. That behavior actually made price swings worse. 

Matthew Thompson, who helps manage equity ETFs at Little Harbor Advisors with his brother Michael, said he tracks expiry events like this closely because they help shape his short-term plays in volatility. “We’re mostly interested in the dealers and how they have to hedge all of that exposure,” Matthew said on Wednesday.

Expiration may unleash new volatility next week

Friday’s triple witching event is the kind of thing that people like Matthew use to reposition fast. And the size of this expiry isn’t routine. Vishal Vivek and Stuart Kaiser, who both work as strategists at Citigroup, told clients the upcoming expiration was “notable.”

Normally, these quarterly triple witching events don’t bring more chaos than monthly expirations. But this time, the stakes are different. There’s no single way to measure how many contracts are expiring, because it depends on what you count.

But Citigroup estimated $5.8 trillion in total notional options open interest will expire Friday. That includes $4.2 trillion in index options, $819 billion tied to single stocks, and another $708 billion on US ETFs. Rocky’s higher $6.5 trillion figure folds in options on equity index futures as well, which aren’t always included in every calculation.

That final total is what has traders paying attention. Once all that exposure clears, the market loses the “pins” holding it in place. That means new bets can be made. Dealers will have to re-hedge. And if gamma flips again, the market could suddenly start reacting hard to moves. Volatility can spike without warning when you pull the hedging rug out from under Wall Street.

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