[Good Morning Market] Option Expiration Day Before the Holiday... Impact on the Domestic Stock Market?

[Image source=Yonhap News]

[Asia Economy Reporter Park Jihwan] On the 10th, a day before the Lunar New Year holiday, as the options expiration date approaches, there is an analysis that volatility in the domestic stock market may increase. Usually, the options expiration date is considered a day when market volatility increases, along with the simultaneous expiration of futures and options known as the 'Four Witching Days.' Especially on the trading day right before the holiday, since a lot of sell orders have come out for risk management purposes, it is expected that volatility will be even greater than before.

◆ Seo Sangyoung, Kiwoom Securities Researcher = While the US stock market showed limited changes and fluctuated around the flat line, the fact that the morning decline was later reduced is expected to have a positive effect on the Korean stock market. In particular, the weakness of the US dollar against other currencies, the sustained rise in international oil prices, and the continued upward trend of the Russell 2000 index are expected to positively influence foreign investor flows. Today is the options expiration date, and depending on foreign futures trends, the market's range of change may widen, so attention to related supply and demand is necessary. Ultimately, the Korean stock market will show changes after starting higher, depending on foreign investor flows. Similar to the characteristics of European and US markets, an individual stock market will unfold, and for stocks that had large rises and falls, profit-taking and rebound buying may flow in, leading to a market that tries to match levels.

◆ Song Seungyeon, Korea Investment & Securities Researcher = The highest foreign program arbitrage balance since last November is a burden. The net buying of arbitrage by foreigners, which has been continuously observed since the January expiration, is also a reason for concern about foreign investor flows on the expiration day. The accumulated balance after the last expiration is the highest level since November 2020. This contrasts with the direction of financial investment and pension funds, which have continued to engage in selling arbitrage. Of course, not all arbitrage trades are included in program arbitrage, so it cannot be considered 100% accurate, but the presence of a buying arbitrage balance means there is a possibility of selling spot stocks, ETFs, etc., to liquidate the balance on the expiration day. Although the absolute size of the balance is not large, it could impose some burden on supply and demand.

◆ Bae Hanju, Shinhan Financial Investment Researcher = The domestic stock market still shows a rapid pace of rise. Since the conclusion of the US presidential election in November last year and the news of vaccine development, the stock market has continued its strong performance until recently. As of the end of January this year, the 3-month return of the KOSPI was 31.3%, the highest level since May 2009. Unlike November and December last year, which recorded monthly returns of 14.3% and 10.9%, respectively, the return in January this year was lower at 3.6%, but the upward trend resumed in February, recovering to the 3100 level. Comparing the KOSPI's rise and earnings improvement, the index's rise has been faster than the pace of earnings improvement. Based on expectations of economic normalization, earnings improvement continues, while stock prices reflect expectations more strongly, widening the gap between the KOSPI's rise and earnings improvement speed. As of February 5, the 3-month change rate of the 12-month forward net profit was 12.3%, and the difference between return and earnings change rate reached 17.0 percentage points. Past experience shows that the speed gap between stock prices and earnings repeatedly expands and contracts. A decline in stock prices could reduce the gap between the two indicators, but as earnings improvement continues, adjustment in the pace of stock price rise also leads to gap reduction. Considering the abundant liquidity environment based on central banks' policy stances and the acceleration of domestic and international vaccine distribution, the direction of stock prices and earnings is more likely to be upward than downward.

◆ Yuanta Securities = Ahead of the Lunar New Year holiday, the market is generally in a lull, lacking momentum to drive stock price rises. The presence of the options expiration date is also expected to act as a burden. Major Asian markets are closed in observance of the Lunar New Year. Given the upcoming holiday, a cautious stance is expected to prevail over trading that anticipates future market direction.

This content was produced with the assistance of AI translation services.