Fearless Traders Shun Options as Kospi Risk Declines

As options traders from the U.S. to Germany and India grow more concerned about a selloff in stocks, they’ve never been so sanguine in South Korea.

The Kospi 200 Volatility Index, the benchmark gauge of demand for protection against swings in Seoul-listed equities, has dropped 7.6 percent in the past three months and reached a record low on April 17, the biggest retreat among 12 options measures tracked by Bloomberg worldwide. That compares with a 9 percent gain in the U.S. and a 100 percent surge in India.

While the highest valuations for global shares since 2008 have spurred speculation that their two-year rally is overdone, South Korea’s Kospi index is still trading within 10 percent of its level during the depths of the financial crisis in March 2009. Low valuations are providing a floor for the $1.2 trillion stock market while the nation’s strengthening currency, current-account surplus and recovering home sales have spurred foreign investors to boost holdings.

“This is the bottom level and the market is expected to move to the upside,” Kim Chul Min, a money manager at Mirae Asset Global Investments Co., South Korea’s third-biggest asset manager with $50 billion, said by phone on April 17 from Seoul. “It seems like a good time to start making investments with the low volatility.”

The Kospi 200 Volatility gauge, which measures the cost of using options to protect against stock-market swings, dropped to 12.11 on April 17 from 13.11 three months ago, while the 50-day historical volatility on the Kospi 200 Index slid to 10.4, the lowest in more than three years.

Stock Valuations

The Kospi index climbed 0.3 percent to 2,004.22 at the close in Seoul today. The gauge has risen 0.7 percent this month through yesterday to trade at about the same level as its net assets, or about 8 percent higher than its valuation on March 31, 2009. The MSCI All-Country World Index, little changed for April, is twice as expensive as the Korean benchmark equity gauge after its valuation rose about 50 percent in the five-year period.

Global investors bought about $2.8 billion worth of South Korean equities this month, the most among 18 nations tracked by Bloomberg, as improving economies in the U.S. and Europe brighten the outlook for the nation’s trade.

Exports jumped 5.1 percent in March, the biggest increase for that month since 2011, while currency reserves rose to an unprecedented $354 billion, according to official data. The current-account surplus, which reached an all-time high of $80 billion in 2013, widened to $4.5 billion in February, marking the 24th straight month in the black, official data show.

The won climbed 2.5 percent versus the greenback this month through yesterday, the most among 16 major peers. The currency touched 1,031.55 per dollar on April 10, the strongest since 2008.

Trading Range

The Kospi’s low volatility reflects decreasing interest in the nation’s stocks and options, said Kim Jin Woo, an options trader at Hyundai Futures Corp.

South Korea’s benchmark gauge traded in a range between about 1,750 to 2,100 during the past two years, with the index breaching the 2,000 level three times this year. The 100-day average value of shares changing hands on the South Korean bourse fell to about 3.7 trillion won on April 17, the lowest level since June 2007.

“I think most investors have a similar view on the market -- it’s trapped,” Kim said in an interview in Seoul on April 16. “It’s really hard to take positions at this level.”

The number of deals exercised by Kim has shrunk to an average of about 30 to 40, whereas he said the figure used to be as high as 600 back in 2007.

Total volume of most-active options traded on the Kospi 200 was 1.07 million on April 17, 37 percent lower than the 20-day average volume of 1.7 million, data compiled by Bloomberg show.

Property Boost

Still, an improving housing market may buoy domestic consumption and help spur growth in Asia’s fourth-largest economy. Home prices posted year-on-year gains for the past five months, rising 1.1 percent in March, the fastest pace since September 2012, Kookmin Bank data showed. More than 89,000 homes were traded nationwide in March, up 34 percent from a year earlier, according to the Ministry of Land, Infrastructure and Transport.

“There’s no reason to be afraid of a selloff at the moment,” Moon Sung Jeh, a derivatives trader at Woori Investment & Securities Co., said in a phone interview from Seoul on April 15.

The economy may expand 4 percent this year, the fastest since 2010, Finance Minister Hyun Oh Seok predicted April 12. That matched the Bank of Korea’s estimate, which was raised this month from 3.8 percent.

Low volatility offers a good entry point for stock investors, said Huh Nam Kwon, who helps manage $8 billion in assets as the chief investment officer at Shinyoung Asset Management in Seoul.

“This seems to be the right time to buy,” he said. “The market may really start taking off in about a year or so.”

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