The best answer I could find is this (from the OIC web page): Q: What happens with my options contracts when a company is delisted from an options exchange? A: If a stock fails to maintain the minimum standards for price, trading volume and float prescribed by the options exchange, option trading can be wound down even before the stock is delisted by its primary market. In that case, no new series would be added at expiration. Trading in existing series would continue until they go "off the board". <B>If trading in the underlying stock is suspended by its primary market for an extraordinary reason before the expiration of outstanding options, the options exchange will specify a procedure for the orderly liquidation of option open interest in a special bulletin</B>.
The clearing houses/brokers are holding the stock in their inventory, so there is stock. It is the value of the put not the stock itself that is important. For instance, if ABC teachers retirement fund were holding 10,000 shares of XYZ stock(the same stock that crashed)your puts would be valuable to them. Also, couldn't you ask your clearing house/broker to sell you XYZ shares? They would ask ABC teachers fund if they wanted to sell some XYZ. Never having been in this situation I can't comment on experience, however if you own the puts you would make a profit with them.
You do not have to wait for expiration and the OCC and the 75 cent auo-exerices to exercise an option. In this case if you exercise your put, you have the right to sell the stock to the buyer at the strike price. You'll ofcourse end up short the stock (assumning it is borrowable). If it's delisted, naturally you don't have to buy it back. However, if not, it's probably best that you pay the penny or two to cover.
I can't recall where but somewhere I read that in this type of situation the value of the put is equal to the strike. That would seem completely logical to me so perhaps it's wrong. FWIW
Does anyone know what the downside risk (besides being able to hold on through the volatility on the way to 0) of being short calls when a company goes bankrupt is?