To The Moon

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Recently, the crisis at Silicon Valley Bank has intensified, with the stock price plummeting at the opening and causing the entire banking sector to collapse.

If you hold SVB（SIVBQ） stocks, you either have to bear huge losses or cut your losses and sell out. If you don't hold SVB stocks, you can only watch from the sidelines and cannot potentialy profit in the face of the expected market downturn.

However, if you use options as a financial tool, you can potentialy profit by using options strategies to deal with the expected market downturn after the market opening. Do you remember the option strategy diagram we learned before?

Today, Tiger Academy will teach you how to potentialy profit from using the buying put option strategy and protective put option strategy!

First, let's take a look at what happened after the opening:

1、Silicon Valley Bank crashes

On March 9th, SVB stock price plummeted by 60%, evaporating approximately $9.6 billion in market value, marking the largest single-day drop since its listing in 1988.

Data source: Tiger trade app

At this point, investors can be divided into two categories in the face of the expected market downturn:

The first group doesn't hold any stocks and only wants to potentialy profit from using options.

The second group holds SVB stocks and wants to use options to hedge their risks.

So, what strategies should they use respectively? Don't worry, let's first review the basic concepts of options.

2、How to potentialy profit from Using Options Strategies?

In a previous article, Tiger Academy explained the basic principles of options. In the article "Purchasing during earnings season | Practical Options Trading Guide", Tiger Academy reminded readers that options are essential rights, where the buyer of an option has the right to exercise it in the future. There are two types of options: call options and put options.

A call option gives the buyer the right to buy an underlying asset from the seller at a predetermined price in the future. For example, if the exercise price of a call option for SVB stock is $1 now, it means that the buyer of the option can buy a certain number of shares of SVB stock from the seller in the future at a price of $1 per share.

If the SVB（SIVBQ） stock price soars above $1 in the future, the buyer of the option can potentialy profit by exercising the option or selling the option at a higher price.

A put option gives the buyer the right to sell an underlying asset to the seller at a predetermined price in the future. For example, if the exercise price of a put option for SVB stock is $1 now, it means that the buyer of the option can sell their SVB stock to the seller in the future at a price of $1 per share.

If the SVB stock price plummets below $1 in the future, the buyer of the option can potentialy profit by exercising the option or selling the option at a higher price.

Therefore, it is evident that we can use put options on SVB stock to potentialy profit . How can we do that?

If you are a type one investor who wants to profit solely from a stock price drop, you can use the strategy of buying put options. Here are the specific steps:

During the opening trading period of Silicon Valley Bank stock on March 9th, we can buy a put option with an exercise price of $150. Due to negative news, the closing price of the put option on the previous trading day was $0.2. On March 9th, the opening price was $16, an increase of 7,900%. Assuming we buy at the opening price of $16, and the closing price is $51 on the same day, we can potentialy profit of 2.1 times the investment.

Data source: Tiger Trade app

Of course, if you are the second type of investor, a holder of SVB stocks, then you would use a protective put option strategy.

This strategy also involves buying put options, but it is more focused on hedging losses. In other words, it uses the profits from the put options to offset losses from a significant drop in SVB（SIVBQ） stock price, and sometimes the profits from the options can even exceed the losses from the stock price drop.

On the other hand, if there is a turn of events in the SVB（SIVBQ） situation and the stock price does not drop as much as expected or even rises, then the maximum loss from the options is limited to the premium paid.

As an example, on March 9th, after the market opened, the SVB（SIVBQ） stock price dropped about 60%. If you bought put options with an equal amount of money, the intraday gain was 218%, resulting in a net profit of 158%.

Data source: Tiger Trade app

And if there is a turnaround in the SVB（SIVBQ） event on the same day, causing the stock price to soar, then the intrinsic value of the put option will be zero since the stock opening price of 176.55 is greater than the put option strike price of 150. Only the time value remains in the option's total value.

Since the time value is only related to the length of time until the expiration date, the loss due to the drop in stock price will not be too great, and the potential gain from the increase in stock price is theoretically unlimited.

Well, that's all for today's sharing. If you want to learn more about options, please pay attention to detailed lessons, and we'll continue our discussion in the future.

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Investing carries risk. Not financial advice. Published by Tiger Fintech (NZ) Limited (NZCN: 8187510)

Tiger Brokers Australia does not offer short options and most portfolio strategies.

Options trading involves a high level of risk and is not suitable for all investors. You should only invest the amount that you can afford to lose. Please confirm that you have read and understood the Financial Services Guide, Options Product Disclosure Statement and Target Market Determination on the website before trading.

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