If a company goes bankrupt, or out of business, what becomes of the Put holders? Does the contract still have to be honored? I know it's great to be short the stock when the company goes bankrupt but I'm not positive about the options.
Options require the underlying to be traded. If trading is halted on the underlying, so is trading on the options. I asked this question of the OCC about a year ago (ahem, Delphi). In short, they said you're out of luck if trading is halted for any reason.
Options are contracts, which are legally binding until expire. Even if a stock is halted from trading, you still can exercise the options or be assigned.
for your information if you didn't know, most futures/options traded on CBOT have both upper and lower "limits' out of which trading will be automatically be stopped "for the day". this is to safeguard against price manipulations and also avoide market rushes/collapses, and has little to do with what the underlier is. i'm not familiar with when the last limit was put up. btw, to answer ur question, if a company is bankrupt ur option is worthless, so is 90% assets of "stock holder" and any economical liquidation that has any valuable asset (if any) will first go to bond holders than to 'preferred' stock holders. when there is no stocks TRADED, what are u going to excercise ur option on!
Are you sure? OCC told me exactly what Batman did (that sentence didn't help my credibility)--if there's no trading of the underlying, there's no settlement, no nothing. Basically, their message was, "If you think they're going to halt trading, you'd better close your options out"
That's what I think too but I am not sure. Technically, someone would have the obligation to buy my worthless shares if I hold the puts. That's the risk the put seller took. Correct? It seems to make sense.