Cooling Danger: How Call Options Expiration Today Could Slow Market Rise

Options Expiration Looms as Market Momentum Faces a Test

After a volatile month in the markets, investors are currently holding a large volume of bullish call options set to expire on Friday, coinciding with the monthly May options expiration.

According to Brent Kochuba, founder of SpotGamma, a data and analytics firm focused on options markets, dealers’ hedging of these long positions has contributed to the stock market’s recent gains over the past several weeks.

However, with these positions soon expiring, the market’s recovery momentum may begin to slow.

“I argue that the unwinding of call option value leads both to bearish hedging flows and a loss of momentum. This is the largest imbalance in favor of call options I’ve ever seen,” Kochuba stated.

The scale of this call skew is reflected in the chart below, provided by SpotGamma. The company adjusts the value of each option contract based on how close it is to profitability at expiration, using current market prices.

Another widely used methodology—employed by investment banks such as Goldman Sachs—estimates the total value of contracts expiring on Friday at $3.4 trillion, which is a relatively standard amount for a monthly expiration, according to Kochuba.

Investors’ inclination toward call options has become increasingly pronounced in recent weeks as equities continue to rise. By the close of trading on Wednesday, the Cboe put-call ratio had fallen to 0.7—the lowest level since February 14, according to Dow Jones Market Data. At that time, equities were trading just below record highs.

When investor demand is heavily skewed toward call options, market makers in the options markets typically need to hedge their exposure by buying additional shares or stock futures.

After a spike in volatility in April, driven by President Trump’s aggressive tariff policies, the Cboe Volatility Index (VIX) has declined at the fastest pace on record. Meanwhile, the S&P 500 has gained more than 18% from its April 8 bottom, according to FactSet data.

Danny Kirsch, head of options at Piper Sandler, offered a similar interpretation to Kochuba’s.

Kirsch said he expects increased volatility to return to the markets as early as next week, once options dealers are no longer required to hedge long positions as aggressively.