Options expiration is the day when a large number of options expire. On this day, traders and funds have to close or restructure their positions, causing large cash flows to hit the market, and prices may behave unpredictably.
We are currently witnessing one of the most unusual options expirations in recent years. This time, the majority of options are call options (bets on stock price increases). Over 90% of all options that expire today are indeed calls. This reflects record optimism in the market, partly due to a pause in the U.S. trade wars.
Why does this matter? When everyone buys call options, market makers, to balance their risks, are forced to buy the underlying stocks themselves. This amplifies price increases — the higher the stocks, the more market makers have to buy. This effect is called negative gamma — essentially, it’s when growth fuels itself.
In recent weeks, the market has been rising precisely due to this effect — the index #SPX has increased by about 20%, almost reaching historical highs. But after today’s expiration, this effect will end — traders will close their positions, and market makers will reduce their purchases. As a result, a correction may be possible next week.
Analysis of similar situations in the past shows that after such mass purchases of call options, markets often corrected. For example, in February of this year, after a similar options expiration, the index #SPX fell by 10%.
The market is particularly vulnerable right now because volatility (the range of price fluctuations) is very low. This means investors have relaxed and are not prepared for unpleasant surprises. Therefore, any bad news — economic statistics or problems in trade negotiations with China — can quickly trigger panic and crash the market. This is especially dangerous now, when the market is at a peak of optimism and volatility is at a minimum.
The key zone for #SPX right now is 5900–6000 points. This is where a lot of call options are concentrated. If these positions are closed after expiration, prices may go down.
The next important options expiration will be in June, and it may have an even greater impact on the market, as large positions are already open there. In the near future, the market may either remain around 5900–6000 or drop to 5300.
It is important to remember that liquidity in the market remains weak — this is evident from the wide spreads (the difference between buying and selling prices). This makes the market even more sensitive to any news.
I expect the market may correct after today’s options expiration. Due to low volatility and an excess of optimism, it makes sense to think ahead about hedging and prepare for possible unexpected movements.