Leveraged ETF trading frenzy has turned the tables: Nearly 70% of SK Hynix's trading volume comes from derivative hedging.

Notice that one of the hottest artificial intelligence (AI) concept stocks in South Korea is now increasingly being driven by demand for its derivative products. Leverage Shares analyst Sandeep Rao stated that a series of leveraged exchange-traded funds (ETFs) linked to SK Hynix have sparked massive derivative trading volumes, with these products and their related hedges estimated to account for 60% to 70% of the chip manufacturer's stock trading volume. This phenomenon highlights how investor enthusiasm for AI has evolved from initially buying stocks directly to leveraging ETFs increasingly dominating trading activity. Over the past year, SK Hynix's stock price has surged by about 780%, leading to such a large scale of options trading that some market participants suggest fund flows may be as important as the company's fundamentals. Rao stated, "Funding for SK Hynix stock is increasingly coming from leveraged ETFs, rather than interest in the company's stock itself," "To a large extent, the current spot stock market has become 'the tail wagging the dog of leveraged ETFs' rather than the other way around." Following the success of a fund launched in Hong Kong last October, South Korean issuers have sparked a trend of launching stock-linked leveraged ETFs last month. In order to maintain their target return, these products must use derivatives to rebalance daily, triggering additional trading in the underlying stock and options markets. On Tuesday, the number of outstanding options for SK Hynix surged nearly 17 times in about a month, reaching a historic high. Large volumes of call options began trading after normal trading hours. SK Hynix's stock price saw drastic fluctuations this week, dropping nearly 8% on one day and then surging 16% the next. On Friday, the stock rose 9.7% at one point. Tanweer Sandhu, Chief Global Derivatives Strategist at BI, stated, "The concentrated bullish options activity in SK Hynix may reflect the operational mechanics of leveraged products and their hedging demands, which can amplify market rallies and pullbacks when positions are adjusted." The rise of leveraged ETFs has long raised concerns about their impact on underlying assets. This concern is particularly urgent in South Korea, as SK Hynix accounts for nearly a quarter of the benchmark KOSPI index. The Chief Investment Officer of Southern Dongyang Asset Management Company, which oversees a $10 billion SK Hynix leveraged ETF, has stated that the fund's daily rebalancing has limited impact on the market. SK Hynix options trading floods the market However, shortly after these new South Korean leveraged ETFs were launched, Goldman Sachs' sales department described them as potential "volatility accelerators." On Monday, amid a sharp drop in SK Hynix's stock price, the volume of options traded surpassed 400,000 contracts, a level of activity unseen since 2017 for Samsung Electronics. Chris Murphy, Co-Head of Derivatives Strategy at Hanwha International, stated, "For the broader market, this means that SK Hynix has become another benchmark, indicating that the trends of AI and storage chip leaders have surpassed mere fundamentals. This does not mean that its trends are disconnected from fundamentals, but it does suggest that the stock may have stronger momentum and greater intraday volatility than simply what the fundamentals imply."