The South Korean stock market is paying the price for the high leverage in global AI trading.
As the KOSPI index corrects sharply, the leverage, options positions, and market maker hedging mechanisms that fueled the recent AI rally are now amplifying the downturn in the opposite direction. Goldman Sachs views this more as a liquidity-driven position reset rather than a reversal in AI investment logic, but the market still faces significant volatility risk until the mechanical selling pressure is fully exhausted.
On Monday, the KOSPI fell another 4.5%, approaching the first key support zone near 6250 points. The index has broken below its 100-day moving average but is still holding above its 200-day moving average. Meanwhile, the put/call ratio for South Korea's AI leader, SK Hynix Inc, once reached an extreme 27 times, highlighting how severely crowded long positions are acting as a major amplifier in this decline.
For global investors, the adjustment in the South Korean market is not just a regional event; it serves as a risk lesson on how crowded trades can backfire. When a rally is driven by leverage and derivatives, the pullback is similarly magnified by these same forces.
From Parabolic Rally to Technical Breakdown
Warning signs were evident earlier.
As early as June 23rd, market analysts noted that the KOSPI had evolved into a classic "parabolic asset." The steeper the ascent, the greater its dependence on continuous new capital inflows. Historical precedent shows such rallies rarely cool down gently and often conclude with sharp corrections.
This prediction is now materializing. The KOSPI has breached its 100-day moving average, entering the critical zone between the 100-day and 200-day averages. While the RSI has entered deeply oversold territory, history suggests that bottoms formed from parabolic moves often require time to consolidate, and oversold conditions can persist far longer than markets anticipate. The 200-day moving average, coinciding with the long-term uptrend line, remains the most crucial technical support level.
Options Imbalance Triggers Chain Reaction, Mechanical Selling Persists
Beyond technical patterns, the previously accumulated options imbalance in the South Korean market is more concerning.
During the rally, investors frantically bought call options, creating the rare scenario of "spot prices rising alongside implied volatility." This meant that even as stock prices hit new highs, the cost of options protection did not fall but instead became increasingly expensive.
As implied volatility was pushed to extreme highs, the cost of purchasing protective put options surged dramatically. Many investors ultimately chose to forgo hedging, holding stocks in naked positions. When the market abruptly reversed, these funds lacked the buffer of options and were forced to sell the underlying stocks directly, further intensifying the decline.
Currently, KOSPI implied volatility still prices in daily moves of nearly 6%. During the rally, call option demand pushed volatility higher; in the downturn, panic-driven put demand continues to elevate it. Regardless of market direction, options protection remains costly, making physical stock sales the primary outlet for risk release.
Previous Goldman Sachs analysis indicated that the highly concentrated derivatives trading in South Korea has made market maker rebalancing a significant force influencing stock prices. Their model suggests that a 5% move in the underlying index could trigger approximately $4.7 billion in market maker rebalancing trades, equivalent to about 13% of the South Korean stock market's average daily trading volume.
This impact is even more pronounced for heavyweight stocks like SK Hynix Inc and Samsung Electronics Co Ltd. Goldman estimates that the corresponding market maker rebalancing for these two companies could each exceed 20% of their respective average daily trading volumes. The mechanical fund flows that propelled the rally are now, in reverse, driving the decline.
JPMorgan had previously noted that options positioning in South Korea's core AI assets had reached extreme levels, with the put/call ratio for SK Hynix Inc once hitting 27 times. Such a one-sided positioning structure continuously reinforced the uptrend during the rally phase but rapidly transformed into an accelerator for deleveraging once the direction reversed.
SK Hynix as an AI Trading Microcosm; Goldman Sees a Position Reset
As one of Asia's most representative AI trading targets, SK Hynix Inc has now fallen to its lowest level since mid-May. However, its share price remains above both its 100-day and 200-day moving averages, indicating its long-term technical structure is not yet completely broken.
Its RSI has dropped to its lowest level since late March. The last time a similar oversold condition occurred, the stock price subsequently experienced a rapid rebound. However, market participants caution that oversold conditions merely indicate concentrated short-term selling pressure and do not necessarily signal a market bottom.
The impact on retail investors is more pronounced. During the peak of the AI frenzy, substantial funds flowed into the 2x leveraged long SK Hynix Inc ETF. This product has now retreated to levels seen in late April. For investors who bought near the highs less than a month ago, the fund would need to gain approximately 250% to recover its losses, once again highlighting the compounding decay of leveraged ETFs during periods of high volatility.
Nevertheless, Goldman Sachs does not view this adjustment as a structural inflection point in the AI investment cycle but rather defines it as a liquidity-driven position reset. The firm argues that long-term fundamental drivers like data center capital expenditure have not changed, but short-term market pricing is being dominated by shifts in leverage, liquidity, and derivatives positioning.
The South Korean market provides a representative case study: when a market becomes the most concentrated leveraged expression of a global AI trade, the reversal of the trend is unlikely to unfold linearly. Instead, deleveraging occurs at a speed and magnitude far exceeding expectations, driven by the combined effects of leverage, options, and market maker hedging mechanisms. For global investors still holding crowded AI positions, the adjustment in the South Korean market may serve as a leading indicator for observing the global risk appetite in AI trades.
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