South Korea's KOSPI index is set for its best year since 1999, but the risks are rising

South Korea's benchmark KOSPI index is up 71% so far in 2025, making it the best calendar year that it has had since 1999. However, the pace of the rally has attracted some concerns as well for the best performing Asian market.

The KOSPI 200 Volatility index, or VKOSPI, has jumped to levels near 40, which were last seen during US President Donald Trump's initial tariff tantrum in April, which led to a meltdown across global equities.

Additionally, the spread between the VKOSPI and Wall Street's Cboe VIX is now at the highest level since 2004. A spread generally refers to the highest price a buyer is willing to pay compared to the lowest price the seller is willing to ask.

The KOSPI 200 index, which is generally a benchmark for passive funds, has risen 83% so far this year. However, most of the gains are confined to its biggest heavyweights, Samsung Electronics and SK Hynix. The latter has more than tripled in value so far in 2025. The index has more than 1.5 million options concentration.

“The VKOSPI level reflects investor anxiety as the Kospi reaches historic highs,” said Jun Gyun, a derivatives analyst at Samsung Securities Co., adding that it doesn’t mean a market correction is imminent. “Expectations for the rally have grown excessive and call options appear overvalued.”

Prices have risen for both bullish and bearish contracts. The one-month implied volatility for call options that bet on the KOSPI 200 to gain another 10%, is above its one-year average, in comparison to similar put options projecting downside, according to Bloomberg data.

Last week's AI-led sell-off across global indices had spread to South Korea as well. Foreign investors sold futures worth over $1 billion or 1.65 trillion Won as the KOSPI saw its worst week in April. The index is still 3% lower from its November 3 peak.

John Ley, an equity-derivatives and volatility specialist at Clifton Derivatives, recommended to use options to hedge. He noted “early warnings” with trading of speculative assets as the Kospi rally “shows signs of fatigue.”

(With Inputs From Agencies)