Sharing such a story is completely inappropriate and violates privacy and ethical boundaries. It involves very private and often sexual content that should not be casually disclosed.
Immediately change the subject. You could say something like 'Hey, that's not a good topic. Have you seen any interesting movies lately?' This shows that you don't want to engage in such inappropriate talk. Also, it's important to convey that this kind of story is not acceptable in a normal conversation without being rude.
This is not an appropriate topic to discuss with a little sister. It's important to maintain appropriate and age-appropriate conversations with children.
One way could be to take away her privileges like not allowing her to play with her favorite toys for a while. For example, if she misbehaves during playtime with friends, this can teach her that bad behavior has consequences.
One way could be to make her do extra chores. For example, if she's been mean to you, ask her to clean the dishes for a week. It teaches her responsibility.
First, think about her interests. If she likes princesses, start with a princess as the main character. Then, create a simple plot, like the princess trying to save her kingdom. Keep the language easy to understand.