Market Turmoil in South Korea: How to Trade Options?

South Korean Market in Turmoil! What Happened?
South Korea trended on social media last night following a sudden political shift. Though the initial drama has subsided, aftershocks persist. A short while ago, the Chief of Staff and Senior Secretary of the Presidential Office collectively resigned. Meanwhile, at a private meeting of the ruling People Power Party, some consensus emerged regarding demands for President Yoon Suk-yeol to resign from the party, call for the cabinet’s collective resignation, and dismiss the defense minister.

The Korean Confederation of Trade Unions (KCTU) has announced an indefinite strike until President Yoon steps down, as reported by The Korea Herald and CNN on December 4.

Impact on the Market
South Korea’s financial markets are reeling from these developments. The KOSPI index fell by over 2% during early trading, and the Korean won experienced significant overnight and early morning depreciation. These movements placed pressure on broader Asia-Pacific markets, with the Nikkei index reversing gains and Australian stocks declining.

Financial Commission Chair Kim Byung-hwan stated that all available measures would be deployed to ensure market stability. A ₩10 trillion market stabilization fund is ready for stock market interventions, while a ₩40 trillion bond market stabilization fund and programs for purchasing corporate bonds and commercial paper (CP) will also be utilized.

The President Speaks
At 4:27 AM local time on December 4, President Yoon announced the lifting of martial law, which had been imposed for about six hours the previous evening. Despite this, political tensions remain high. The opposition Democratic Party called for Yoon’s resignation, intensifying the instability.

Economic and Political Repercussions
Korean financial stocks were hit hard this morning, with KB Kookmin Bank plunging 6%, KB Financial Group dropping over 7%, Hana Financial Group falling more than 5%, and Shinhan Financial Group losing over 4%. On December 3, the Korean won dropped 2.82% to a 2022 low of ₩0.69 to the dollar but later recovered to ₩0.707.

Rumors suggest South Korean authorities intervened by selling dollars to stabilize the won. ING senior economist Min Joo Kang warned that this crisis might negatively affect South Korea’s sovereign credit rating, although the extent remains uncertain.

Options Strategy: Selling Put Options

For investors looking to capitalize on market uncertainty, selling put options may be an attractive strategy.

Advantages of Selling Put Options

1. Income Generation: The primary profit comes from collecting the option premium.

2. Discounted Purchase Opportunity: If exercised, the investor buys the asset at the strike price minus the premium received, potentially below market value.

3. Cash Flow Stability: In low-volatility markets, this strategy can generate steady income.

Risks

1. Unlimited Downside: If the underlying asset's price plummets, potential losses can be substantial.

2. Market Exposure: The seller is obligated to purchase the underlying asset if the price drops below the strike price.

EWY Put-Selling Example
Investors bullish on the iShares MSCI South Korea ETF (EWY) can sell a put option expiring on December 20 with a strike price of $55 for a premium of $210.

Profit and Loss Breakdown:

• Maximum Profit: Collected premium = $210.

• Maximum Loss: (Strike Price – Premium) × 100 = Unlimited (if EWY approaches $0).

• Break-even Point: Strike Price – Premium = $52.90.

Scenario Analysis:

1. EWY Closing Price ≥ $55

   • The put option expires worthless, and the seller keeps the $210 premium.

   • Profit: $210.

2. EWY Closing Price < $55

   • The seller buys EWY at $55/share.

   • Loss Formula: (55 − Market Price) × 100 − $210.

3. Break-even Price: $52.90

   • Profit above this price, loss below it.

This strategy offers a way to profit from the volatility in South Korea’s financial markets while accepting the associated risks.