A investor in their 40s began trading weekly options at the end of last year. Options are derivatives that allow the buying and selling of products such as KOSPI 200 at a specific price at a specific time in the future, but weekly options have a shorter expiration of one week.
Recently, A is learning a scalping strategy (trading in minutes and seconds) to respond to increased market volatility. The focus is on accumulating revenue through multiple transactions while the profit per transaction is minimal. Recently, he earned 200,000 won after liquidating a call option position within 16 seconds. A noted, "With the increasing volume of call option sales lately, entering and liquidating options have become easier," and described it as "dopamine investing."
As the volume of weekly call options sold has significantly increased, there are more cases of investors entering the options market targeting this situation. This is influenced by the massive inflow of funds into the weekly covered call exchange-traded fund (ETF) that emerged last year. An overly large volume of call options is being sold compared to the market size, leading to a distortion in the weekly option prices.
The growth of the weekly covered call ETF market has coincided with an increase in weekly option sell transactions. As of the 26th, the monthly weekly option sell transactions totaled 14,527,324 contracts, marking an approximately 15% increase compared to the same period last year (12,623,355 contracts). Among them, institutions accounted for 6,855,120 contracts, making up half.
While the sales volume is high, there is a lack of demand to absorb it, causing the weekly call option premiums to drop significantly. The average monthly premium for weekly options fell from about 0.8% last August to 0.4% this year. Although the recent increase in market volatility has created an environment where call option premiums could rebound, they still remain at low levels.
The problem is that the trading activities of institutions, which account for half of the transactions, are predominantly one-sided (selling). The number of investors taking buy positions in the weekly options market is limited, and as the selling volume from management companies suddenly increases, the premiums naturally become cheaper.
The weekly options market is already evaluated to be relatively immature compared to the regular (monthly) options market in terms of trading volume and participant base.
This means it is easy for investors buying options to engage in short-term investments. Although the increase in options trading can be attributed to the recent market volatility, the personal proportion in monthly weekly options buying transactions has increased from 26% to 30% over three months. Individuals tend to take more buy positions than sell positions, mainly receiving institutional volumes.
A spokesperson from an asset management company stated, "Due to the structure of covered call ETFs, they have to sell call options to secure premiums and build positions, while also providing dividends from incoming funds, making it almost compulsory for management companies to transact." He added, "Individuals are receiving a lot of institutional volumes, but as the volume increases, sellers have no choice but to sell cheaply."
The covered call ETF is a strategy that involves holding the underlying asset while selling call options based on that asset to generate revenue from the option premiums. Domestic weekly options are based on KOSPI 200, and products are listed with maturities on Mondays and Thursdays each week.
Since KB Asset Management launched the 'RISE 200 Weekly Covered Call' ETF in March last year, subsequent products such as 'PLUS High Dividend Weekly Covered Call' in August and 'KODEX 200 Target Weekly Covered Call' and 'KODEX Financial High Dividend TOP10 Target Weekly Covered Call' in December have followed. On the 5th of this month, 'PLUS High Dividend Weekly Fixed Covered Call' was also listed. The net worth of these products amounts to a total of 1 trillion won.
The covered call ETF, which generates revenue through the strategy of selling weekly options, continues to see inflows of funds. However, as the options market fails to accommodate this situation, there are analyses suggesting that ultimately, investors in covered call ETFs may incur losses.
If the premiums decrease, to provide dividends targeting an annual return of 12-15%, ultimately, the principal must be sacrificed. In such a scenario, if the index being followed declines, the ETF price could further drop. This month, while the KOSPI 200 index has risen by 2.60%, the five weekly covered call ETF products have shown a lower rate of decline ranging from minus (-) 1.15% to 1.76%.
A securities industry representative commented, "Just because the volume of options sold has increased doesn't mean that an immediate price distortion issue has arisen, but it has made the option selling strategies of management firms more critical in a market that is advantageous for short-term investors looking to buy." He continued, "Options are high-risk products where investors can lose their entire investment if they do not reach the strike price by the expiration date, so individual investors should undertake thorough study before investing."