The Korean won is flashing warning signs as hedge funds aggressively build bearish positions in the options market, mirroring trading patterns that preceded the New Taiwan dollar’s violent 2.5% intraday swing earlier this month. DTCC data reveals won-dollar option volumes surged to 2024 highs last week, with Barclays analysts noting concentrated demand for dollar calls/won puts—a structure that profits from won depreciation. The activity coincides with market speculation that U.S. trade negotiators are pressuring South Korea to accept won appreciation as part of bilateral talks, creating a potential policy divergence with Taiwan’s hands-off approach.
The won’s 1-month implied volatility has spiked to 8.7%, exceeding its 6.5% average since January, as traders price in event risk around the U.S.-Korea trade discussions. Market microstructure shows particular interest in 1,300-1,320 won-per-dollar strikes for June expiry—levels that would represent 3-5% depreciation from current spot. This positioning echoes the buildup to May’s Taiwan dollar “flash crash,” when leveraged funds abruptly unwound carry trades after misjudging the central bank’s tolerance for currency weakness. South Korea’s $422 billion in foreign reserves provide a thicker defense than Taiwan’s, but authorities may hesitate to intervene aggressively given U.S. Treasury’s heightened scrutiny of FX management.
Barclays warns the options skew now prices won downside risks at nearly twice the premium of appreciation scenarios, reflecting hedge funds’ preference for cheap volatility plays ahead of potential macro catalysts. With Korea’s export growth slowing and the BOK maintaining restrictive policies, the won remains vulnerable to a momentum-driven selloff if the 1,280 support level breaks. Market participants are bracing for possible repeat of the Taiwan episode, where algorithmic trading exacerbated the move once stop-losses triggered below key technical thresholds. The next test comes with May’s trade balance data on June 1—a surprise deficit could accelerate the bearish positioning.
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