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Collar Option Strategy by Major Shareholder caused Sharp Fall in Tencent

China internet giant Tencent Holdings Ltd (0700.HK) share price plunged from above HK$150 to HK$127.40 after its major shareholder Ma Huateng disclosed that he had reduced his stake in Tencent by 5 million shares at $102.70.


His disposal of Tencent shares at such a low price was actually committed last June when Tencent share price was between $83 and $96.  Ma had then entered into a contract which involved him implementing a collar option strategy.  A collar option strategy involves simultaneously buying lower strike price put option and selling higher strike price call option while holding the underlying share.  Both the call and put options are out-of-money.  This strategy limits the upside gain of the share but protect the holder from a sharp fall in share price.  The below diagram depicts the payoff of a collar option strategy.


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