Company bankrupt before short is covered

Discussion in 'Trading' started by RedDuke, Mar 19, 2007.

  1. RedDuke


    What happens in the case when there is a great paper profit on the short side and then the company goes bankrupt and delisted from the exchnage?

    Is profit gone? If not, how can it being locked?

  2. Ultimate victory for the shorts? That would be equivalent to you covering the position at 0. I suppose it will go on to your 1099 as realized profit.
  3. blast19


    Ultimate win for you brother! Kiss the sky!
  4. RedDuke


    Does it mean that no shares needs to be bought back and the $ immedialty locked in after bankruptcy?
  5. Absolute Slam Dunk.

    I wonder if you even have to report it on your taxes?

    I guess you must, but heck - the basis is never complete. Shares were never bought?

    But then, if you are long a stock that goes BK, you can have it *declared* sold and then report it for cap losses.

    Anybody have this happen to them?
  6. Contact your broker and ask what needs to be done to realize the gain in your account. (Normally, it's not realized until you buy and cover...)
  7. Never had it happen to me, but there's a special procedure to follow... contact your broker for details.
  8. VictorS


    just because a company declares bankruptcy doesn't mean the stock's value is $0. i personally have never seen that.
    what happens is the company:
    1) is delisted 2)declares bankruptcy 3)is issued a new stock symbol 4)trades at a stock price less $1

    over time 3 things usually happen 1) it continues to trade otcbb 2) it eventually emerges from bankruptcy(kmart) 3)the company is dissolved (stock price is usually then valued at $0 (enron)

    kmart actually dissolved stock shares and emerged from bankruptcy.

    so you will have time to close short
  9. RedDuke


    It did not happen to me, I do not trade stocks, only futures. I have a friend who heavily shorted major sub-prime companies in January, new Century among them, and he ended up in this situation for the fist time in his trading career. I got very curious, what happens.
  10. If it's delisted, the big boys let it sit there. There are armies of guys who sit on offers of a penny or less. Then, you take your credits.

    If you do not cover, there is no closing transaction. The IRS is never notified. Only way the find it is an audit.
    #10     Mar 19, 2007