lets say I buy 10 GM 1 dollar put options for 53 cents (530 dollars) and GM goes chapter 11 what happens to the option? will it be worth 1 dollar plus the 53 cents?
The most your option will be worth is one dollar if GM goes to zero. If GM went to .47 on the day of expiration of which ever month you purchased you would break even. But if GM goes to .47 tomorrow you would make some money because there would be some time value left in the option.
Look at it this way. All GM $1 puts with the same expiration date are identical. They are interchangeable. The word for that is fungible. That should tell you that your 53 cents is complete irrelevant. After all, other people buy and sell that put and the price is not 53 cents. I'm sure you see that everyone's puts are worth the same amount - and that amount cannot possibly pay any attention to the price at which the option was bought or sold. Does that make sense to you? Mark http://blog.mdwoptions.com/