To The Moon

Hello everyone. Today, I'd like to use the Ctrip stock crash incident to discuss managing short put positions.

What Happened:
💡 Cause: On January 14th, based on China's Anti-Monopoly Law, the State Administration for Market Regulation formally launched an investigation into Ctrip for suspected abuse of market dominance.
💡 Impact on Stock Price: Ctrip's US-listed stock (Ticker: TCOM) closed at $75.68 on January 13th and plummeted 17% to close at $62.78 on January 14th. Ctrip's Hong Kong-listed stock (Ticker: 09961) closed at HKD 569 on January 14th and fell sharply intraday, down 20% to HKD 452 on January 15th.
💡 Impact on Business: Ctrip issued an announcement stating that all company operations are normal and that the investigation has not yet had a material impact on its business.

Changes in Put Options:
💡 Sharp Price Increase: Taking the Ctrip Hong Kong January 29th expiry 500 put $09961 20260129 500.00 PUT$  as an example, its closing price was around HKD 1.1 on January 14th. On January 15th, the intraday price surged to as high as HKD 50.

💡 Implied Volatility Surge: For the same $09961 20260129 500.00 PUT$ , the historical volatility was around 39.65%, but on January 15th, the implied volatility spiked to 68.12%. Higher volatility leads to higher option prices.

💡 Liquidity Crunch: During extreme market moves, the bid-ask spread for options widens significantly, increasing trading costs.

If you are bullish on Ctrip, can you implement a short put strategy under these circumstances?
💡 Crash Cause Analysis: An anti-monopoly investigation constitutes a major negative event, potentially exerting long-term pressure on the stock price. The investigation outcome is unknown; if penalties exceed expectations, the stock price could decline further.
💡 Profit Logic of Short Puts: The strategy profits by collecting premium, based on the expectation that the stock price will not fall or will rise. However, if the price continues to fall, the seller faces two main risks: 1) Being assigned the stock at the strike price, leading to unrealized losses; 2) The option price skyrocketing, causing massive losses if trying to close the position.

How to Handle Existing Short Put Positions?
💡 Core Principles: Control losses, reduce risk exposure, avoid emotional trading.
💡 Immediately Assess Position Risk.

💡 Handle Based on Situation:

1. Close the Position: For Ctrip HK options, one contract represents 150 shares. If you get assigned, you need funds for 150 shares. The approximate loss if assigned equals: (Strike Price - Expiration Day Stock Price) x 150 shares - Premium Received. If the outlook is unclear and you are uncertain about the severity of the situation, closing the position immediately locks in the current loss. This is suitable if you do not want to own the underlying stock or lack the margin for assignment.

2. Roll the Position (Extend): If you are bullish on Ctrip and have a view that the stock will stabilize and rebound after a certain period, you can roll the position. This involves closing the current short put and opening a new short put with a lower strike price and a later expiration date. Caution: If the situation worsens and the stock price keeps falling, the new position could also incur losses, essentially prolonging your risk exposure.

3. Hedge with Long Puts: If you expect further price declines, you can buy put options to hedge the downside. However, this only protects against future losses, not the loss already incurred from the initial short put. This strategy is more suitable for large positions because the high volatility post-crash makes puts expensive, adding extra cost to buy protection.

4. Accept Assignment and Hold the Stock: If you are willing to own the shares, you can wait for expiration and take assignment. The risk with this approach is that if the stock price continues to fall after you buy it, your unrealized losses on the stock position will increase.