GM will be officially out of the Dow Jones index by June 8, there is some speculation that some index buying was going on "because index funds still have to keep the industrial iconâs shares weighted in their portfolio" according to a WSJ blog So some index selling could happen after GM is dropped
This reminds of me when I traded NWA after the declared bankruptcy. I was short $5 calls, long stock and short $2.50 puts. Somehow I lucked into the stock dropping to 30 cents and the calls expiring worthless, it then ran up to $7 and the puts expired worthless and I sold the stock I had bought at $2.50 to cover the short calls for a profit. Even after the shares were declared worthless and the stock was dropping down to zero, millions of shares were still being traded up and down. Too much for me to figure out.
These things tend to trade for years on the OTC market. Look at LEHMQ. When you exercise your long put, someone is assigned and you have an obligation to deliver the stock to the individual/account. Thus you are short the security unless you purchased it before exercise. The OCC is not the counterparty; however, they guaranty the transaction in case of default. If you are a retail trader and endup short GMGMQ, they may force you to cover since the stock is a penny stock. Depends on your broker. If a large number of other positions are exercised at the same time (option expiration) you may be forced to cover in competition with others in a thin market. I would hold the position as long as possible since the odds are that GMGMQ drifts to a nickel or so in time. Just before exercise, buy the stock in the OTC.
There is some press out there claiming these options will be cash settled. I believe this applies to chapter 7 BK and not chapter 11 reorganization as the stock willl not be settled for years.
What do you think are the chances of the Delphi type situation?Lots of CDS and little in bonds created a problem in the settlement, here you got all these puts so perhaps there is a chance everyone will try to buy the stock at the same time to be able to deliver at exp
Much thanks for all of the advice. That's what I did. I called the OCC to clarify things, and they basically said I should hold on to the puts, and that the stock should drift to a dime or nickel soon. Sometimes, you gotta ignore the static and go with what makes sense. The moderator should ban that sushi guy. What an idiot. My broker is not much better. He said I should exercise my puts, and that was yesterday. I'm glad I stuck with my own reasoning and stayed put--no pun intended. The stock traded down over 33% today. If I exercised my put yesterday, I would have missed out on an additional 20% gains. Riding this one out to just before expiration.
Give us 2 more weeks. We still got time. That's why I never bet more than 1% of my portfolio on options. You never know.