Back in May, I sold some in the money put options on Radio Shack that expire in Oct. If RSH should go bankrupt, are those options exercised or no longer valid and therefore, worthless? My breakeven is $.75
The risk in selling puts is if the underlying moves down. The puts you sold...someone out there bought them. If RSH goes to zero, you obligation WILL NOT vanish along with the company.
You're basically on the hook for the full underlying value of the options less the premium received if you hold till expiration and by expiration the company has gone bankrupt (i.e. $0/share or delisted assuming zero). Basically you're buying those shares as agreed at that strike price. It probably won't go to zero right away though. You'd buy a bunch of shares, which are listed on NYSE now, but worse comes to worse if they do go bankrupt or delisted, it may probably trade pink sheet as a penny stock, before going to zero or bought out.