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A massive expiration has traders on edge

A massive options expiration on Friday could send billions of dollars into the marketplace and spark a plethora of selling in stocks, say some experts.

On Friday, less than 48 hours after the Federal Reserve raised interest rates for the first time since 2006, 353 million worth of options contracts will expire, a significant increase from the three-year average of about 334 million going into December expiration.

"Much of the open interest in the S&P 500 is close to at the money and represent $444 billion notionally," Mike Khouw said Thursday on CNBC's "Fast Money." The large number could have serious implications on the market, which has treaded water all year, falling nearly 1 percent in 2015 as of Thursday's close.

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"The key level to watch for on Friday's open is 2,045, because that's where a big slug of the open interest lies," warned Khouw, referring to the number of S&P contracts that have been sold but not repurchased. That's just points above the S&P 500's current level of around 2,042. A move up from that level could make the expiration a nonevent, said Khouw, but a move below has him worried.

"If the market remains calm, no problem, it's a bit like a cold war with one side waiting for the other to blink," he said. "If it starts to move however, some options traders may need to sell as the market declines, or buy as the market rallies to hedge their positions, and that activity, combined with lower liquidity may magnify any move."

A heightened amount of volume could send the VIX screaming higher.

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"The market may be holding its breath regarding expiration," added Khouw.

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  • Melissa Lee

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

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