The author is an analyst of NH Investment & Securities. He can be reached at email@example.com. -- Ed.
With market conditions having deteriorated since March expiry, the government is adopting a range of measures, including a ban on short selling for six months, setting up a stock market stabilization fund, and planning to scrap the 30% cap rule. Now is the time to monitor the effects of these measures. In particular, the brake on market makers’ short selling promises to bring about positive expiration effects.
A look at market conditions prior to upcoming expiry: Market improvement likely
Responding to the spread of Covid-19, global stock markets tumbled, and amid the unprecedented correction, the Kospi twice dipped below 1,500p. But, the Kospi has since shown a technical rebound, alongside the government’s announcement of a range of measures to stabilize the stock market, including banning short selling for six months, instructing market makers to refrain from shorting, and setting up a stock market stabilization fund. In addition, the 30% cap rule is likely to be scrapped, a move that would likely relieve Samsung Electronics (SEC) of related risks. Such measures should positively influence the effects of derivatives expirations on trading volume, volatility of returns, etc. In particular, the ban on shorting should prohibit new arbitrage selling, while the likely abolishment of the 30% cap rule should curb passive selling. Having bet on strong selling, foreign investors’ position in the futures market has recently turned neutral. Accordingly, market conditions prior to the upcoming expiry look healthy.
Passive events: Rise in Kosdaq 150 replacements via irregular rebalancing
Following a revision to the Act on External Audit of Stock Companies, an increasing number of firms have received unsatisfactory audit opinions due to a strengthening of accounting standards, and as a result, the replacement of major stock index constituents is on the rise. We note that some Kosdaq 150 constituents have been replaced via irregular rebalancing this year (following the submission of audit reports for 2019 financial results), with four Kosdaq 150 stocks being replaced in March alone. Additional replacements could take place in April. Other notable events for April include the launch of a securities market stabilization fund and the possible lifting of the 30% cap rule.
April expiry strategy: Expect neutral or better expiration effects
Market instabilities remain in play. Led by foreign investors, program selling has continued on investor risk aversion. But, we take note of several positive signs, including capital inflows (led by retail investors) and securities firms and pension funds’ refrain from aggressive arbitrage selling. While basis improvement looks difficult for now, program buying is likely if basis recovers to near the theoretical price level. We expect neutral or better expiration effects on the upcoming expiry date. Upon securities firms’ program buying, even favorable expiration effects are likely.