The surge in one of South Korea's hottest artificial intelligence (AI) stocks is increasingly being fueled by demand for its derivative products. An analyst from Leverage Shares, Sandeep Rao, noted that a series of leveraged exchange-traded funds (ETFs) linked to SK Hynix Inc have generated enormous derivative trading volumes. This activity and the associated hedging flows are now estimated to account for 60% to 70% of the chipmaker's stock trading volume.
This development highlights how the investor frenzy for AI has evolved, moving from initial direct stock purchases to leveraged ETFs commanding a growing share of trading activity. Over the past year, SK Hynix's stock price has skyrocketed by approximately 780%. The resulting scale of options trading has become so large that some market participants now suggest fund flows may be as significant as the company's fundamentals.
Rao stated, "The fund flow for SK Hynix stock is increasingly coming from leveraged ETFs rather than interest in the company's shares themselves. To a large extent, the spot stock market has now become 'the tail wagged by the dog of leveraged ETFs,' not the other way around."
Following the success of a fund launched in Hong Kong last October, Korean issuers sparked a wave of new leveraged ETF offerings tied to the stock last month. To maintain their target returns, these products must perform daily rebalancing using derivatives, triggering additional trading in the underlying stock and options markets.
On Tuesday, the open interest for SK Hynix options surged nearly 17-fold in about a month, reaching a record high. Large block trades of call options also began appearing after regular trading hours.
SK Hynix's share price experienced extreme volatility this week, plunging nearly 8% one day before soaring 16% the next. On Friday, the stock jumped as much as 9.7%.
Tanvir Sandhu, Chief Global Derivatives Strategist at Bloomberg Intelligence, commented, "Some of the intense call option activity in SK Hynix likely reflects the mechanics of leveraged products and their hedging needs. When these positions are adjusted, it can amplify stock market rallies and pullbacks."
The rise of leveraged ETFs has long raised concerns about their impact on underlying assets. This concern is particularly acute in South Korea, where SK Hynix carries a weight of nearly one-quarter in the benchmark Kospi index.
The Chief Investment Officer of CSOP Asset Management, which manages a roughly $10 billion leveraged ETF tracking SK Hynix, has previously stated that the fund's daily rebalancing has a limited impact on the market.
However, soon after these new Korean leveraged ETFs were launched, Goldman Sachs Group Inc's sales desk described them as potential "volatility accelerators." On Monday, as SK Hynix shares tumbled, its options trading volume surpassed 400,000 contracts, a level of activity not seen for a stock like Samsung Electronics Co Ltd since 2017.
Chris Murphy, Co-Head of Derivatives Strategy at Susquehanna International Group, said, "For the broader market, this means SK Hynix has become another benchmark showing that the movement of AI and memory chip leaders has transcended pure fundamentals. This doesn't mean its moves are disconnected from fundamentals, but it does suggest the stock may have stronger momentum and greater intraday volatility in trading than what fundamentals alone would imply."
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