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My trading record (2021-07-22, short put Didi)

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解釋賣出Didi認沽期權的原因,並分享該策略的優點及缺點。

Abstract: Explain the reasons for short put Didi options and share the advantages and disadvantages of this strategy.

Transaction detail

What I want to share with you today is the transaction I made on July 22. The details are as follows:

Short put option

  • Didi Global Inc (US stock code: DIDI)
  • 300 option units
  • Expiration: 2021-08-20
  • Strike price: US$8
  • The underlying stock price at the time of trading: US$10.4
  • Option value: US$0.35
  • Commission fee: US$2.13
  • Total premium collected: US$102.87
https://smartskyinvest.com/wp-content/uploads/2021/07/didi_1-mo_chart_2021-07-23-1.png
Didi stock one-month chart
Source: https://seekingalpha.com/symbol/DIDI/chart

A quick review of short put option strategy

First of all, if you are not sure what a short put is, you can check my previous article “Basic option strategies – long call, short call, long put and short put“, you can also view the actual operations of the short put that I have done before in “My transaction Record“. To put it simply, short put is an operation method to look up the underlying stock. When the underlying stock price falls below the strike price at expiration, the premium will be your net profit. But I said in the previous articles that you can’t just think about making a premium when doing short puts. You should always think about the worst-case scenario and be prepared for both directions.

Why did I short put Didi?

I understand that everyone has already lost confidence in Chinese stocks. In addition, Didi has repeatedly been talked about with recent rumors that the Chinese mainland government will severely punish Didi, and even the amount of punishment may exceed the previous penalty imposed on Alibaba. In addition, rumor said that Didi may be forced to delist in the United States. So yesterday, on July 22, Didi plunged 11.3% throughout the day to US$10.2, which was a 27.1% drop from the IPO price of US$14, and its market capitalization evaporated by US$20.1B.

I believe many people especially Chinese have heard about Didi Chuxing or even use their services every day. It is the largest online ride-hailing platform in China. If you want to learn more about this company, you can check out our earlier article “China’s number one online ride-hailing stock-Didi Chuxing“. I personally think that with the scale of Didi and the high penetration rate, it certainly has its own value in the industry after so many years of business development.

Of course, the policy risk is certainly huge, but I think the current decline has already reflected the unfavorable factors to a certain extent. If now I open short put on Didi and see if I have chance to buy its stocks at an even lower price, I think it would be much safer and the reward-to-risk ratio should be quite good. Based on my strike price of US$8 and the premium received, if the option is finally exercised, the cost price will be about US$7.65 per share, and the return on the premium received is about 4.4%. This price will be another 25% drop from the current price, that is, a total of 45% lower than the IPO price. Of course I think it is difficult to reach this price within a month, but I understand that everything can happen. And if it really drops to US$8, I think it might be good to start to buy a bit of Didi. Of course, it is very important to control the bet, and most importantly you have to be prepared to take risks that you can afford. I think now is the time to be greedy while others are fearful on this stock or even on the entire Chinese stocks. I believe that there is a high probability that Didi will recover from the bad news one day and start its growth again.

Timing of short put

I still want to repeat it again, when is the best time to do short put? Well, although there is no absolute best time to do any investment and any operation would not be risk-free, it is very important that it is definitely better and safer to open short put when the stock price drops, especially after a period of sharp decline, than the moment while a sharp rise in the stock price. It will be much safer for you. Please pay attention to this.

Comments and sharing

If you have any questions, please feel free to leave a message or comment below, I will reply you. Or if you find anything incorrect in the article, please let me know and learn from you. If you find it interesting or it may help you in any sense, please share with other people.

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