South Korea's stock market is now witnessing a "hedging wave": the put/call ratio hits a five-year high, historical data predicts a potential 17% drop.

South Korea's Kospi 200 index-related put options have sharply increased in quantity compared to call options, approaching a key level indicating a market downturn. As of the latest closing, the ratio of protective put options to call options has reached nearly 2.5 times, hitting the highest level in five years. The index has only touched this threshold a few times before. In July 2007, when the ratio surpassed 2.5, the Kospi 200 index fell almost 17% in the following month. After surpassing this level again in January 2021, the index dropped over 5% in three weeks. With investor caution rising towards AI stocks due to concerns about stubborn inflation potentially keeping interest rates high for longer, the strong upward momentum in the South Korean stock market is beginning to weaken. Despite the benchmark Kospi index still being the best-performing major index globally this year, it has fallen by nearly 14% since hitting a peak last week. Meanwhile, an indicator measuring expected volatility is approaching historical highs relative to Wall Street's VIX volatility index. "The put/call ratio further confirms the signal that global momentum trading (deeply involved in the South Korean stock market) is cooling," said Arun Singhal, CEO of Indicus Capital, which provides consultancy for family offices and hedge funds. "Even at current levels, hedging and locking in profits makes sense, especially against the backdrop of repricing interest rates and inflation expectations." Stephane Martin, Head of Derivatives Sales at Optiver Asia, pointed out that after retail and institutional investors bought call options for several months in a row, the options flow in recent trading days has shifted towards buying put options for downside protection. This coincides with a surge in trading of put options in the iShares MSCI South Korea ETF listed in the United States. "The trend of the Kospi ultimately depends on chip stocks," said Xin-Yao Ng, a fund manager at Aberdeen. "While we are still overweight on Korean tech stocks, higher than expected volatility is making us cautious about taking on excessive risks."