Chapter 16: A Calculated Gamble

"Since you treated me, I'll explain. Both futures and options are derivative products. Do you know the difference between them?"

"Roughly."

Sang-yeop, the senior, took a sip of cola and began explaining.

"Futures are an agreement to buy or sell a product at a predetermined price at a specific point in the future."

The reason for making a transaction in advance, even when it can be done in the future, is because product prices are not stable.

If the price drops in the future, the seller incurs a loss while the buyer profits.

Conversely, if the price increases, the seller profits and the buyer incurs a loss.

So, both sellers and buyers make transactions in advance, setting a specific price and time to avoid major losses and secure reasonable profits.

Therefore, the more volatile the price of a product, the more active the futures trading is. Stocks and oil are typical examples.

"Options work similarly in concept. While futures involve trading in the future based on an agreement made today, options are just the right to trade."

Options come with an expiration date.

The right to buy a product at a set price by the expiration date is called a call option, and the right to sell is called a put option.

"Futures transactions are set regardless of future price fluctuations, so there's no backing out. But with options, whether the transaction happens or not depends on price changes by the expiration date."

Exercising the right to trade is entirely up to the buyer. On the expiration date, if the buyer stands to profit, they'll exercise their right; if they stand to lose, they won't.

Thus, the more likely an option is to be exercised, the more expensive its premium, and the less likely, the cheaper.

"When securities firms or funds issue options, financial experts calculate probabilities and returns using various formulas. A mistake could lead to huge losses. One interesting thing about options is that the buyer's potential gain is unlimited, while the loss is limited to the premium paid. But for the issuer, the gain is limited to the sale price, while the potential loss is unlimited."

For example, if a stock is priced at 2 million won, and there's a put option allowing you to sell it at 1 million won by the expiration date.

Since the chance of the stock price halving is low, it's unlikely the put option will be exercised.

Hence, the option is issued at a very low price.

But let's say by the expiration date, the stock price rises to 2.5 million won.

No one in their right mind would exercise a put option to sell at 1 million won when they can sell at 2.5 million in the market.

The option buyer would abandon their right. In this case, the buyer's loss is limited to the premium they paid, and the issuer gains the same amount.

Now, let's consider the opposite scenario.

What if something unthinkable happens, and by the expiration date, the stock price drops to 100,000 won?

The buyer has the right to sell it for 1 million won, even though it's worth only 100,000 won in the market.

That's a 900,000 won profit per share.

Of course, the buyer would exercise their right, and the issuer would have to honor it.

You might think the issuer only needs to pay the 900,000 won difference per share, but what if the option was sold for just 100 won?

For the issuer, it's like selling a right for 100 won and then having to pay out 9,000 times that. If the buyer bought 1 billion won worth of this option, the issuer would owe 900 billion won.

Such situations are rare, of course.

But...

Sang-yeop senior smirked bitterly.

"Good things don't happen often, but bad things inevitably do, like the 9/11 attacks or the Lehman Brothers collapse."

When something like that happens, put option prices skyrocket, and issuers have to pay out enormous amounts.

During the financial crisis, major global investment banks suffered astronomical losses due to the derivatives they issued, leading many to either go bankrupt or seek government bailouts.

"What happens if the issuer goes bankrupt?"

"Well, it's like preparing for an avalanche by getting insurance, but when the avalanche hits, the insurance company gets buried first. What can you do then?"

If the payer goes bankrupt, there's no way to collect.

Various regulations and margin systems are in place to prevent such scenarios, but if the worst happens, there's no solution.

"However, such things only happen once in a blue moon. Most of the time, securities firms and funds end up sweeping up the small investors' money."

After that basic explanation, more advanced topics followed, things only experienced traders would know. I listened carefully, mentally noting the important points.

Hearing it explained in person helped clarify what I had only known in theory before.

When the discussion ended, Sang-yeop looked at me and asked,

"I'd advise against options trading, but... what exactly are you planning?"

I thought about giving a vague answer but decided to be honest. It didn't feel right to lie when I was asking for help.

"Seo-sung Electronics."

"Is it a call or a put?"

"A put."

Sang-yeop's expression turned to surprise.

"Why? They've been doing well since the launch of the L6."

"That L6 is going to be discontinued."

"What?"

I told him about Taek-gyu's phone exploding and the other incidents reported online.

Sang-yeop asked, still looking puzzled.

"That's it? No other reason?"

Of course, I had more reasons.

I just couldn't explain them here.

"I'm just thinking if the explosions continue, they might discontinue it. I'm not sure."

Sang-yeop gave me a concerned look and warned me.

"Be careful. One wrong move in options trading, and you could lose it all, like I did."

"Got it."

We left the restaurant, said our goodbyes, and parted ways.

After Sang-yeop left, we got into the car.

I asked Taek-gyu, "You heard him, right? One wrong move, and it's all gone. You still want to do it?"

Taek-gyu nodded and looked at me.

"Of course. What about you?"

I grinned.

"Let's give it a shot."

Investing and speculation are fundamentally different.

Typically, if you can handle the risk, it's called investing. If you can't, it's called speculation. However, the distinction is often very thin. The same action can be considered an investment by one person and speculation by another.

Buying barren land with unmanageable debt is speculation. But what if you know about a city development plan? What if you know that a new city will be built on that empty land? In that case, it's no longer speculation; it's an investment.

We are in a similar situation. No one knows if Seoseong Electronics' stock price will go up or down tomorrow. However, we do know that the L6 will be discontinued.

If you're not just hoping for luck but have certainty, it's no longer speculation—it's an investment.

Taek-gyu summed it up simply:

"If I do it, it's an investment. If others do it, it's speculation, right?"

I nodded in agreement.

"That's exactly right."

People generally oppose real estate speculation, but when they buy a house themselves, they see it as an investment, not speculation.

I contemplated how best to invest. The easiest method would be short-selling. The expected profit margin is about 20%. Even if things go wrong, the losses would be limited to a few tens of percent. However, the profits would also be limited.

On the other hand, buying put options could yield several times or even dozens of times the profit if our prediction is correct. But in the worst-case scenario, we could lose all our investment.

"Low risk, low return; high risk, high return, huh?"

The lower the risk, the lower the returns. The higher the risk, the higher the potential returns.

After much thought, I reached a conclusion.

"Let's buy 70% in put options and the rest in short-selling."

We needed to avoid the worst-case scenario, even if it meant slightly reducing the profit margin.

Seoseong Electronics' stock price, which had been hovering in the late 1.4 million won range, had surged sharply after the release of the L6, now sitting at the 1.6 million won mark.

The L6 had received rave reviews for surpassing N-phone in both design and performance, and its sales in the global market had exceeded those of its predecessor by more than 40%.

It was predicted that the company would announce record-breaking profits in the next quarter, and brokerage firms were raising their target stock prices one after another.

In reality, stock prices often behave unpredictably because they reflect not the present value but the future value of a company.

In other words, Seoseong's current stock price had already factored in the future profits from the L6.

But if the L6 gets discontinued?

Not only would the present profits disappear, but the future profits would be wiped out as well.

Since the stock had risen more than 10% since the L6 launch, it would surely drop by at least that much. Considering the losses from refunds, the price could fall by at least 20%.

While browsing the internet, Taek-gyu spoke up.

"Another one exploded."

"Let me see."

This time, the incident happened in the U.S., not Korea. What made it even more serious was that it didn't happen during charging.

Seoseong announced they would collect the phone for investigation, claiming that all previous explosions had been due to external impact and that this one was likely the same.

With explosion incidents occurring both in Korea and abroad, even foreign media began to take notice.

We didn't have much time left.

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Just a few years ago, Korea was ranked number one in the world for derivative product trading volume. Although that's no longer the case, Korea still boasts the highest trading volume relative to its market size.

On average, 500 billion won worth of options and over 1 trillion won in futures are traded daily. It's to the point where it's hard to tell whether it's a stock market or a gambling den.

Currently, in the futures and options market, a fierce battle is underway between those trying to turn their lives around in one shot and the issuers looking to rake in blind money.

I sat in front of the computer, logged into the home trading system, and took over for Taek-gyu.

There were various strike prices for the put options. The higher the strike price, the more expensive the option. Conversely, the lower the strike price, the cheaper it was.

Of the 13.8 billion won in the account, 800 million won was my money.

Although Taek-gyu had initially offered to cover the entire investment, since we were in this together, I felt I needed to commit my share as well.

So, I decided to put my 800 million won into the pot.

Tap, tap.

I began typing and started buying Seoseong put options.

Regardless of the strike price, if the stock didn't drop as expected, these options would all become worthless.

I wasn't sure if this was the right move.

Shaking off my doubts, I continued typing.

However, as I was buying, I encountered an unexpected issue.

"There's not much volume available."

Most derivatives are issued based on indices like KOSPI 200 or HSCEI, not individual stocks. Even Seoseong Electronics only had a limited number of options issued, although several types were available given the size of the company. But there weren't many that fit our criteria.

I clicked my tongue.

"I didn't account for this."

This was something that even Senior Sang-yeop hadn't mentioned.

In hindsight, it was obvious. He probably assumed our funds amounted to a few hundred million or, at most, 1 billion. He couldn't have imagined that we had 13.8 billion won.

Seoseong Electronics currently accounted for 19% of the stock exchange. In other words, one company was holding nearly 20% of the market's capitalization.

No matter how much Korea has grown as a conglomerate-driven economy, Seoseong's market cap of over 250 trillion won is staggering.

Theoretically, if Seoseong's stock fell by 10%, the KOSPI index would drop by 2%.

"If it falls by 20%, then the KOSPI will drop by 4%?"

Given its weight, the discontinuation of the L6 wouldn't just affect Seoseong Electronics but would send shockwaves through the entire stock market.

Ding, ding!

With every alert sound, contracts were executed. As the cash balance dwindled, the options balance increased.

Of the 13.8 billion won, we had poured 13 billion into put options and short selling.

Only 800 million remained in the account.

"Why aren't you buying more?"

"The 800 million is for your living expenses."

Even in the worst-case scenario, 800 million would be enough to live on for a while.

There was no turning back now.

All that remained was to wait for the results.