By Saqib Iqbal Ahmed

NEW YORK A $16 billion JP Morgan fund, expected to reset its options positions on Friday, is drawing traders' attention as a potential source of additional volatility at the end of the worst month for U.S. stocks this year.

The JPMorgan Hedged Equity Fund, with about $16.05 billion in assets, holds a basket of S&P 500 stocks along with options on the benchmark index and resets hedges once a quarter.

Its holdings include some of the market's biggest names, such as Apple Inc, Microsoft Corp and Amazon.com Inc.

The fund's sheer size means its options reset can rack up a massive surge in trading volume in S&P 500 options and set off related hedging activity that can aggravate market moves.

The position adjustment comes at a tricky time for U.S. stocks as a surge in U.S. Treasury yields has hit equities, pulling down the S&P 500 5.2% for September, putting it on pace for the worst month for the index since December.

The recent slide in the market has carried the benchmark stock index close to the level where some of the trade's options could be triggered.

"There are times when it is not as impactful but I think it is more impactful this time," said Chris Murphy, co-head of derivative strategy at Susquehanna Financial Group.

How the fund's rebalancing could end up affecting the whole market has to do with market makers - typically big financial institutions that facilitate trading but seek to remain market-neutral.

As things stand, with the S&P 500 trading around the 4,290 level, market makers are short about 40,000 September 29 S&P 500 options at the 4,210 strike.

Market makers who have sold these put options must sell stock futures to minimize their own risk, as the market drifts closer to the strike price of the sold options.

"As we move lower, market makers need to sell and as we move higher market makers need to buy it back," Murphy said.

"So it does exacerbate the move," he said.

The trade's sway on the market may extend even beyond that, Murphy said.

Traders, aware of the impending position adjustment and the potential for associated market ruction, may keep from turning buyers of stocks till the trade is out of the way, Murphy said.

One silver lining is that as the Friday expiration gets closer and the market stays well above the 4,210 level, market makers have less reason to be actively buying and selling stock futures.

If the market holds round the 4,300 level into Friday the options position should not hold much sway on the market, said Brent Kochuba, founder of options analytic service SpotGamma.

"We need to get under 4,250 for the position to have any real pull into Friday," he said.

(Reporting by Saqib Iqbal Ahmed; editing by Megan Davies and Nick Zieminski)