The number of bearish options tied to South Korea’s Kospi 200 Index has climbed so sharply relative to bullish wagers that it is nearing a level that previously foreshadowed market declines.
The ratio between protective puts and bullish calls approached 2.5 times at the latest close, its highest level in five years. The indicator has reached that threshold only a handful of times before. When it rose above 2.5 in July 2007, the Kospi 200 fell almost 17% in the following month. After crossing that level in January 2021, it slid more than 5% over the next three weeks.
The powerful rally in Korean stocks has begun to lose momentum as investors grow more cautious on artificial-intelligence shares amid concerns that sticky inflation could keep interest rates higher for longer. While the benchmark Kospi index remains the world’s best-performing major equity gauge this year, it has lost almost 14% since a peak last week. Meanwhile, a measure of expected swings sits near a record high relative to Wall Street’s VIX volatility index.
“The put-call ratio is offering one more indication of a cooling in the global momentum trade, in which Korea participated heavily,” said Arun Singhal, the chief executive officer at Indicus Capital, an advisor to family offices and hedge funds. “It makes sense to hedge and protect gains even at these levels, especially as interest-rate and inflation expectations are being repriced.”
After months of call buying by retail and institutional investors, options flows in recent sessions have pivoted toward downside protection through put buying, according to Stephane Martin, head of derivatives institutional sales for Asia at Optiver. That coincided with a surge in bearish options trading in the iShares MSCI South Korea ETF listed in the US.
“The direction of the Kospi still comes back to chips,” said Xin-Yao Ng, a fund manager at Aberdeen. “The higher-than-expected volatility makes us cautious about taking outsized risk in Korean tech, even though we are overweight.”
With assistance from Bing Hong Lok.
This article was generated from an automated news agency feed without modifications to text.
