Options expiration could clear path for US stock market volatility rise

• The week after monthly options expiration typically sees the S&P 500 move 2% (either direction) versus 1.5% average weekly moves, based on past year data
• Traders selling call options at the 7,000 level leave dealers 'net long gamma', forcing them to buy dips and sell rallies, which locks the market in a tight range
• Individual stocks like Nvidia and Tesla face heightened volatility risk as roughly 25% of their total open options contracts expire Friday

Market Summary: Options Expiration May Trigger Stock Volatility Surge

Key Development:

Friday's monthly options expiration is expected to increase S&P 500 volatility from historically low levels, according to market experts. The benchmark index is hovering near 7,000, close to record highs, while trading in a tight range.

Critical Data Points:

• Ten-day S&P 500 volatility dropped to 8.1% on Thursday—near its lowest level in a year and roughly half the 52-week average of 17.0%
• Historically, the week following options expiration sees average index moves of 2% compared to the usual 1.5% weekly average
• Major individual stocks face significant contract expirations, with up to 25% of all open options contracts for Tesla and Nvidia expiring Friday

Market Mechanics:

Options traders have been selling call options on the broad index while buying volatility in individual stocks ahead of earnings season. This activity leaves dealers "net long gamma," forcing them to buy dips and sell rallies to remain neutral—effectively suppressing market volatility and keeping stocks range-bound near 7,000.

Companies Mentioned:

Tesla, Nvidia cited as heavily impacted by options expiration.

Upcoming Catalysts:

Multiple volatility triggers loom beyond options expiration:

• Supreme Court decision on Trump administration tariff legality
• January Federal Reserve meeting
• Ongoing investigation of Fed Chair Jerome Powell

Market Implications:

The expiration could remove volatility-suppressing forces, potentially allowing larger market swings. Single-stock options expirations may particularly impact price action in popular trading names like Nvidia and Tesla, creating opportunities for idiosyncratic movements as earnings season approaches.