To The Moon

$PDD Holdings Inc(PDD)$ To get straight to the point, traders need to consider whether they can stomach PDD below $90.

Current PDD options trading can be broadly categorized into three strategies: outright bearish bets, shorting volatility, and delta-hedging.

There is virtually no bullish positioning - one modest put overwrite at the 100 strike, but no notable call buying interest.

Single-leg strategies are dominantly put biased, with the August 30th 95 and 90 strikes emerging as focal points for outright bearish exposure:

$PDD 20240830 95.0 PUT$ 
$PDD 20240830 90.0 PUT$ 

Multi-leg flows are primarily volatility shorts and delta hedges.

On the volatility selling side, the 80 strike has attracted put spread initiations like:

Sell $PDD 20240920 80.0 PUT$ 
Buy $PDD 20240920 60.0 PUT$ 

Why the 80 strike? Put overwriting aims to capitalize on two components - time decay and inflated volatility premium.

For volatility selling, you want a strike low enough to avoid assignment risk, but not so deep out-of-the-money that you miss out on elevated implied volatility.

Today's 30% gap lower was the perfect volatility shorting opportunity - current 30-day IV sits at 62.66% vs 43.95% historical. The 80 strike seems an appropriate level, corresponding to last August's earnings gap higher.

Another noteworthy flow was a delta hedge, buying the 100 puts and selling the 70s shortly after the open:

Long Stock
Buy $PDD 20240920 100.0 PUT$ 
Sell $PDD 20240920 70.0 PUT$ 

Collectively, the favored strike selections point to an expected $80-95 trading range ahead of September 20th expiry. More optimistically capped at 90, but with downside risk well into the 80s.

My view is that PDD has entered a one-way downtrend, with any bounces likely short-lived as it grinds out a protracted basing period.

That said, these option premiums do seem relatively inexpensive given the magnitude of today's sell-off - implied volatilities should arguably be north of 80% following a 30% gap.

Therefore, while I'm bearish, I opted to overwrite via the $PDD 20240906 110.0 CALL$  rather than outright put buying on the open. For pure volatility sellers, tomorrow may present a more attractive entry point.

I still have immense respect for PDD's overseas expansion efforts and their willingness to adapt their domestic strategy. As an e-commerce company dependent on volume, refining their competitive advantages is prudent. But near-term pain seems unavoidable - it may take 1-2 years to find a true bottom.

PDD's plunge has also weighed on the $KraneShares China Internet ETF (KWEB)$, another challenged China equity product where I hold a modest put overwrite position to be rolled next week.