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Even as fear spreads across South Korea's stock market, retail investors are doubling down. The KOSPI 200 Volatility Index (VKOSPI), widely known as South Korea's fear index, has more than tripled over the past year — yet retail investors' margin loan balances have reached an all-time high. Concerns are growing that leveraged investment is amplifying risk to dangerous levels in a market that swings violently between surges and selloffs.

According to Korea Exchange data released Sunday, the VKOSPI averaged 85.42 in June, roughly 3.5 times the June 2025 average of 24.26. The index typically hovers around 20 and rarely exceeds 40 even during periods of market stress, making the current reading an almost unprecedented level of fear.

The anxiety has carried into July. The VKOSPI averaged 88.12 from July 1 through July 3, continuing to reflect extreme volatility.

The volatility index earns its "fear index" nickname because it rises as expectations for future market swings increase. It typically spikes during sharp market downturns but can also climb during periods of wild intraday swings — like those seen recently, when the Kospi has moved hundreds of points in a single session.

The VKOSPI is calculated by working backward from the implied volatility embedded in KOSPI 200 options prices. When investors expect greater turbulence ahead and trade options more aggressively, the fear index rises alongside that activity.

Consider a simple example: a stock bought at 100,000 won ($65) surges to 1 million won in a short period. Even with a large gain in hand, anxiety about a sudden reversal naturally intensifies.

An investor holding the stock can buy a put option with a strike price of 800,000 won, securing the right to sell at that price even if the share falls below it. The maximum loss is then capped at the decline from 1 million won to 800,000 won, plus the cost of the option premium.

This kind of options-based hedging is a standard risk-management tool that institutional investors — pension funds, asset managers and the like — deploy more aggressively as volatility rises. In a market that has been reversing direction multiple times a day, surging institutional demand for hedges has driven up options trading volume, which in turn may have pushed the fear index higher.

Kospi intraday volatility in the first half of this year expanded to its widest since the Asian financial crisis. The average daily trading range — measured as the gap between the session high and low divided by the average price — came in at 3.30 percent in the first half of 2026, the second highest on record. The only wider reading was in the first half of 1998, in the immediate aftermath of the financial crisis, when the figure reached 3.51 percent.

The intraday range is calculated by dividing the difference between a session's high and low by the average price, and serves as a gauge of how sharply the index swings within a single trading day.

Markets have recently seen sessions where the Kospi plunges 5 to 8 percent, only to rebound by a similar margin the following day, deepening the sense of whiplash among investors. In one recent session, the index rebounded more than 400 points in a single day — an unusually large one-day swing.

What worries analysts is that retail investors are becoming more aggressive, not less, as fear in the market intensifies.

According to the Korea Financial Investment Association, the daily average balance of margin loans outstanding in the second quarter stood at 35.94 trillion won — up 15.9 percent, or 4.93 trillion won, from the first-quarter average of 31.01 trillion won, and the highest level ever recorded.

Margin loans represent so-called "debt investing," in which individuals borrow from brokerages to fund stock purchases. The surge suggests retail investors are increasing their leverage on the expectation that extreme volatility creates opportunities for outsized short-term gains — provided they call the direction correctly.

Experts warn, however, that margin investing in a high-volatility environment magnifies both gains and losses, and demands extreme caution. While a correct directional call can generate strong returns, a wrong one can cause losses to snowball rapidly.

"The market right now is in a state of ultra-high volatility that cannot be explained by either a bull or bear narrative alone," an industry official said. "Institutions manage their risk through options and other hedging tools, but for retail investors, the larger their margin exposure, the more even a small misjudgment of direction can translate into a major loss."


th5@heraldcorp.com