Replies to This Discussion | 이 토론에 대한 답글들

Permalink Reply by Tyler Joyner on August 12, 2010 at 9:32am

Hey Robert,

Nice article. The part about ELWs was particularly interesting - I don't currently know a whole lot about them. I certainly didn't realize how much volume they have in KRX.

Your definition of options was a little off. There are two main styles of options, American and European. So-called American options entitle you to exercise (use) the option at any time on or before the expiration date. European style options, however, can be used only on the expiration date. The Korea Exchange uses European style.

So perhaps a better distinction might be that buying (or selling) a futures contract commits you to buy (or sell) that asset at a certain price and date, whereas buying an option gives you the right (but not obligation) to buy the asset at the specified price and date.

I agree that retail investors are certainly a large part of derivatives trading at KRX - about 34%. Institutional investors still make up about 41%, though, so it's not entirely a speculation-driven market. What I'd really like to know is how many individual investors there actually are (not just a percentage of volume, as above), and especially what the average net worth of those individuals is. It seems that in Korea the average guy is a lot more likely to be involved in trading derivatives than in the US.

Thanks for the informative article!

-Tyler

Permalink Reply by Robert Eberenz on August 12, 2010 at 10:35am

Tyler,

Thanks so much for the input. I appreciate you distinguishing the difference between American and European exercise styles, which I left out of this piece because Korea operates on the American style contract and felt it may have added unnecessary confusion.

If we want to get technical, option holders (buyers) have the right (but not obligation) to buy an asset at a specific price at or before the expiration date, if the underlying asset's market value is above (for calls) or below (for puts) the strike price. However, sellers (writers) of options do have an obligation to sell the underlying at the strike price on the exercise date, if the asset's market value is above (short calls) or below that level (short puts).

Your general distinction is definitely helpful in understanding the difference between options and futures. My takeaway from your comment is that options can be a right or obligation to buy or sell up until a specified date (under American exercise), but Futures are static contractual agreements to buy and sell at a specific price on a specific date. Can we agree on this?

With regards to your questions about the nature of the retail speculators in Korean derivatives, one man who may be of great assistance to you is Mr. Alex Choi. He is a branch manager of Daewoo Securities, a member of KBC, and works with individual retail investors on a day to day business. I had the opportunity to meet and interview him about the nature of investing in Korea and perhaps I will dedicate next weeks Economic Slice to the information I took away form that interview.

Mainly, he explained to me that the average Korean investor he works with is not interested in long term investing at all. Apparently, in Korea the longest time horizon for which any individual is willing to commit capital amounts to 5, maybe 10 years, while most hold positions for less than a year. In addition, the annual returns that investors aim to achieve are astronomical by comparison to U.S. investors' expectations. He explained that all Korean investors expect between 10% and 20% annual returns at minimum, while the majority seek 10% to 20% yields over a period of 30 to 60 days.

This interesting cultural dynamic of Korean investing explains the void between derivate volume and spot market fluctuations, and is not fully accounted for by the proportionately higher volatility of Korea's economic growth respective to comparably sized Western economies.

Your feedback to the group here is much appreciated Tyler. I look forward to many future discussions here in the Forum!

Please feel free to add discussions of your own as well to the discussion stream, if you're looking to get more input on this or any topic.

Cheers,

Robert

Permalink Reply by Tyler Joyner on August 12, 2010 at 10:06pm

That's really fascinating. Is it safe to assume that as many Korean investors lose 10%-20% over a few months time frame, or is it more complicated than that?

I didn't mean to split hairs over the options bit - the only reason I brought it up is because I was under the impression that derivatives options at KRX were European style (and hence farther from your first definition of options). That's what it says in their 2009 Fact Book, which you can take a glance at at the link below. I'd definitely like to know if the fact book is incorrect, would you mind double checking that with someone who trades derivatives, like Mr. Choi perhaps?

In any case, page 85 is the relevant one in the fact book, it's the contract specs section for derivatives.

http://eng.krx.co.kr/coreboard/BHPENG08004/view.jspx?bbsSeq=19786&a...

Permalink Reply by Robert Eberenz on August 13, 2010 at 3:16am

Tyler, I'm truly sorry. You are right about the European style, according to the fact-book.

I will double check with Mr. Choi, but I'm sure the fact-book is correct. My apologies to you and to readers...

To your other point, it is safe to say that many individuals in Korea have lost a great deal of money in day trading capacities. It became such a problem a few years ago that all major companies firewalled brokerage sites on company computers, but the development of smartphone trading platform technology has facilitated the craze more recently. Living in Korea, I have met more than a handful of people who have openly admitted losing a great deal of money in the "stock market", and who swear it off as if it were a short lived dependence on crack.

It seems that it's an all or nothing environment for most investors, which translates well into the derivatives space.Anecdotal evidence from the overwhelmingly technical / chartist analysis on the business tv stations also reinforces the short term goals of investors, compared to the constant conversation of longer term trends in the U.S.

Thanks for your help keeping the information accountable Tyler,

Cheers

Permalink Reply by Tyler Joyner on August 14, 2010 at 4:29am

No big deal Robert, these things happen.

Another thing I'm curious about is how difficult (or easy) it was for Newedge to get its full membership to the KRX. I know that the financial sector has been liberalized to some extent and opened up to foreign investment, but how far has that process come? I'm familiar with the process for becoming a clearing member of KRX, but what I'm curious about is how long things actually take, and how the Korean government feels about foreign brokerages setting up branch offices in Seoul.