This market phenomenon may drive afternoon trading

Stocks are mounting a serious comeback on Friday, with the S&P 500 rising almost 2 percent off of Thursday's closing price before losing a bit of ground in the afternoon as it backed off the 1,900 level. And to a certain extent, the move up to 1,900, and intraday retracement from that level, may be due to heavy holdings in October options, which are seeing their last day of trading on Friday.

On the third Friday of every month, a whole batch of options cease trading, meaning that these Fridays are crucial sessions for those whose derivatives positions are narrowly in the green or in the red. For that reason, widely held options can have profound effects on the days' market moves.

In a market phenomenon known as "pinning," the underlying asset's price begins to approach the widely held options strike, and trade carefully around it as expiration draws near. The mechanics of this may be better explained by a financial engineer, but the essence is that as an asset moves closer to a given strike, price traders who hold either puts or calls of that strike have an incentive to buy or sell, pushing the price just past the strike in one direction or another.

And in the SPDR ETF tracking the S&P 500 (which trades under the ticker symbol SPY) the October 190-strike put is extremely popular, with open interest of more than 250,000 options, making it the most heavily held put expiring tomorrow. On the call side, the October 190-strike has open interest of 67,000 contracts, and saw more than 220,000 options have traded today, making it by far the most popular put or call strike of any expiry.

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Around noon on Friday, the SPY appeared strongly drawn to the 190 level, topping out just short of there at $189.75, a high that it hit in three consecutive minutes.

"We always expect a gravitational pull towards and expiring strike with large open interest as options traders have to buy (or sell) an increasing amount of the underlying the closer it gets to the strike," said Jim Iuorio of TJM Institutional Services.

He would look for 190 in the (SPY)—which roughly corresponds to 1,900 in the S&P 500 itself—to be a major level into the close.

"I think with today's rally, there is some magnetic pull that we should expect," Iuorio wrote to CNBC on Friday afternoon. "This pull will probably accelerate if SPY can get about $189."

Additionally, Friday's move comes as volatility has spiked over the course of the week, and "when there's lot of volatility, it's very easy to push to that big strike," Brian Stutland of Equity Armor Investments commented.

Still, while the options expiration may in some way act to draw the S&P 500 to 1,900, the impact may only be on the margins.

The open interest in the 190-strike puts "is going to create some gravity, but I don't know if that's going to be enough of a pull, with everything else going on," said Michael Khouw of Dash Financial.

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  • Melissa Lee

    Melissa Lee is the host of CNBC's “Fast Money” and “Options Action.”

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