AI trading faces "leverage backlash," South Korea becomes the world's first stress test.

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The South Korean stock market is footing the bill for high-leverage global AI trades.

As KOSPI swiftly pulls back, the leveraged funds, options positions, and market maker hedging mechanisms that once drove the AI rally are now amplifying the market's decline in the opposite direction. Goldman Sachs believes this is more of a liquidity-driven position reset rather than an inversion of the AI investment logic, but until mechanical selling pressure is fully released, the market will continue to face significant volatility risk.

On Monday, KOSPI fell another 4.5%, approaching the first major support area near 6250 points. The index has broken below the 100-day moving average but still holds above the 200-day moving average. Meanwhile, the options call/put ratio for Korea's AI leader SK Hynix once reached as high as 27x, making the extremely crowded long positions a major amplifier in the current decline.

For global investors, the adjustment in the Korean market is not just a regional event but a risk lesson on how crowded trades can backfire on the market. When an upswing depends on leverage and derivatives, the downturn is similarly magnified by these forces.

From Parabolic Moves to Technical Breakdown

Risk signals have actually appeared long ago.

On June 23rd, market analysts pointed out that KOSPI had become a classic "parabolic asset." The steeper the rise, the more reliant it is on new inflows, and historical experience shows that such moves rarely cool down smoothly, often ending in sharp corrections.

Now, this judgment is being realized. KOSPI has broken the 100-day moving average and entered the key area between the 100-day and 200-day moving averages. Although RSI has entered deeply oversold territory, historical experience shows that bottoms formed by a parabolic move often take time to digest, and oversold conditions usually last much longer than the market expects. The 200-day moving average, overlapping with the long-term upward trendline, remains the most important technical support.

Option Imbalance Triggers Chain Reaction, Mechanical Selling Pressure Continues

Compared to technical patterns, what deserves more attention is the option position imbalance previously accumulated in the Korean market.

During the upswing, investors frantically bought call options, creating a rare situation where both spot prices and implied volatility rose simultaneously. This means that even as stock prices kept reaching new highs, the cost of option protection did not fall but actually became increasingly expensive.

When implied volatility reaches extremely high levels, the cost of buying protective puts soars. Many investors eventually dropped their hedges, holding stocks with exposed positions. When the market reverses sharply, these funds can't use options to cushion risk and must sell spot shares directly, further amplifying the decline.

Currently, KOSPI's implied volatility still prices in close to 6% daily amplitude. Demand for call options drove volatility higher during the rally; now, panic-driven demand for puts is keeping volatility high in the downturn. Regardless of market direction, the cost of option protection stays high, and spot selling becomes the main outlet for risk release.

Goldman Sachs previously estimated that the highly concentrated derivatives trading in Korea makes market maker rebalancing a major force affecting prices. Their model shows that every 5% fluctuation in the underlying index triggers about $4.7 billion in market maker rebalancing trades, equivalent to about 13% of the average daily turnover in Korean stocks.

For heavyweight stocks like SK Hynix and Samsung Electronics, this effect is even more pronounced. Goldman expects each company's market maker rebalancing amount could exceed 20% of their daily average trading volume. The mechanical money flows that pushed up prices now drive the downside after the market turns.

JPMorgan previously noted option positions in core Korean AI assets have reached extreme levels, with SK Hynix's call/put ratio once as high as 27. Such one-sided position structures continually strengthen rallies as markets rise, but once the direction reverses, they quickly become accelerators for deleveraging.

SK Hynix as an AI Trading Microcosm, Goldman Still Sees Position Reset

As Asia’s most representative AI trade, SK Hynix has now dropped to its lowest level since mid-May, but its stock price still sits above the 100-day and 200-day moving averages, so its long-term technical structure hasn’t been completely broken.

Its RSI has fallen to the lowest since the end of March, and the last time a similar oversold occurred, the stock witnessed a quick rebound. But market participants remind that oversold only signals concentrated short-term selling pressure and does not mean the market has bottomed out.

Retail investors have taken the hardest hit. At the peak of the AI rally, a lot of money poured into the 2x leveraged SK Hynix ETF. Now, the product has fallen back to late April levels. For investors who bought near the recent peak less than a month ago, the fund would have to rise about 250% just to recover losses, as compounding losses for leveraged ETFs become clear during big swings.

However, Goldman does not see this round of adjustment as a structural turning point in the AI investment cycle, instead defining it as a liquidity-driven position reset. The firm believes the long-term fundamentals like data center capex remain intact, but short-term market pricing is now dominated by leverage, liquidity, and changes in derivative positions.

The Korean market offers a highly representative case: When a market becomes the most concentrated leveraged vehicle for global AI trades, reversals rarely unfold linearly, but instead deleveraging happens with far greater speed and magnitude, driven by leverage, options, and market maker hedging mechanisms working together. For global investors still holding crowded AI positions, this adjustment in Korea may serve as an early indicator of global risk appetite in AI trading.

Risk Disclosure and DisclaimerThe market entails risk, and investments should be made cautiously. This article does not constitute personal investment advice, nor does it take into account any individual user's particular investment objectives, financial situation, or needs. Users should consider whether any opinions, views, or conclusions in this article fit their specific circumstances. Investing based on this is at your own risk. ```