Up 14% since July! Forex options traders bet the Korean won rally will continue

According to Zhihu Finance APP, forex options traders are betting that the Korean won's momentum as the leading Asian currency since July will continue. On Wednesday, the premium gap between one-month options benefiting from a rise in USD/KRW and those profiting from a USD/KRW fall shrank for the third consecutive day, indicating rising expectations in the market for further strengthening of the won.

This change comes as the USD/KRW exchange rate fell further on Wednesday to around 1,350, after dropping 1.3% in the previous trading session, marking the largest single-day decline in a month. Since the beginning of July, the won has risen more than 14%. As South Korean chip manufacturers continue to repatriate overseas funds to expand domestic capacity and surging global demand for artificial intelligence (AI) and semiconductors fuels economic growth, the won's rally is expected to persist. These positive factors are prompting options traders to bet that the won's strength will last until the end of the year.

Saurabh Tandon, Global Head of FX Options at Standard Chartered Bank in Singapore, said: "There is currently active demand in the market for downside structures on USD/KRW, mainly through put spreads or European knockouts, with maturities mostly covering up to year-end."

The two largest USD/KRW trades announced on September 21 were both put spreads, reflecting such positioning. According to Depository Trust & Clearing Corp. data, one of these trades will expire on October 21, with strike prices at 1,370 and 1,343 respectively. If the USD/KRW exchange rate is at 1,343 or below at expiry, the trade reaches its maximum value.

Put spreads cost less than standard vanilla puts, as the profit is capped once the exchange rate falls below the lower strike price. European knockout put options also lower upfront cost, but if the USD/KRW rate is below the pre-set knockout level at expiry, the option is void and becomes worthless.