PUTS Question

yeah, and the freakin' idiot that sold u those puts is gonna get away with it, innit.

 

I suspect that the answer to your question is covered in the Characteristics and Risks of Standardized Options document published by the OCC. I scanned it quickly and found some applicable information below. However, it's a lengthy document with supplements, etc. So a more careful and complete read may be necessary before you can be sure of anything.

"If the option is exercisable while trading has been halted in the underlying interest, option holders may have to decide whether to exercise without knowing the current market value of the underlying interest. This risk can become especially important if an option is close to expiration, and failure to exercise will mean that the option will expire worthless. If exercises do occur when trading of the underlying interest is halted, the party required to deliver the underlying interest may be unable to obtain it, which may necessitate a postponed settlement and/or the fixing of cash
settlement prices (see Chapter VIII)."

Don

 

I tend to agree with Don. If you're long the put and the underlying is not trading (for whatever reason), then the only way you could exercise it is if you already own the underlying or sell the put to someone who owns the underlying.
Daddy's boy

 

the puts will settle in cash...the writer takes the correspondin' loss. the underlyin' wont be tradin' cuz it went to 0 due to solvency but it has a price innit, and that's nil.

 

Thanks for your reply Bitstream. According to your info, all is sweet and all one need do is wait til expiry and the long puts will be autoexercised, right? I'll still have to check this with my broker, it all sounds a little strange.
daddy's boy

 

yeah u should get your money but the puts wont be exercised since there's no underlyin' to begin with...that's why i said they'll settle into cash. call your broker and sort it out, u are legally entitled to your profits.

 

Thanks, I appreciate your input.
Best
daddy's boy

 

It would be pointless to exercise a call on a defunct company. However, if exercised, the seller of a put option is obligated to take delivery, ie buy the underlying at the strike. If the co has no value, the buyer – if short – should still be able to pick up the underlying at a nominal cost. The problem here is the seller’s.

I can’t see how a dead co effects the relationship between buyer/seller of an option contract. Whatever the difficulties re counter-parties, won’t the clearing house act as guarantor?

Re FA’s remark, I find OCC’s position staggering. However, for practical purposes doesn’t this situation change to a cash-settled basis? The underlying does not have to be traded, as is the case with some index options.

Batman28. We meet again.

Grant.

 

I presented the original question to Tom Gentile at TA of Stocks & Commodities magazine. Here is his reply:

There are no set rules about options and bankruptcy, but often, the puts will still have value and the out-of-the-money calls will expire worthless. To understand why, lets consider what happens in a bankruptcy. If the options are trading, then shares are probably still listed on one of the stock exchanges. However, when a company files for bankruptcy, the exchange might suspend trading and maybe de-list the stock. When US Airways filed for bankruptcy several years ago, the New York Stock Exchange (NYSE) released a memo stating that the NYSE would suspend trading in the stock because the company said it had filed to reorganize.

A de-listed stock can continue trading on the OTC Bulletin Board (the "Pink Sheets") under a new stock symbol. Shares can be bought or sold through a broker as if it traded on one of the major exchanges.

What about the options? As a rule, the options will trade, but with restrictions. It is not uncommon to see trading limited to closing transactions. If a put owner wants to close out those puts, they can, but no new or "opening" transactions will be allowed. Once de-listed, options on a bankrupt company are limited to closing transactions. Exercise and assignment will involve shares of the bankrupt company, but it might not make sense for a call holder to exercise those calls if the stock has already taken a beating. If shares are trading on the Otc, the put owner has the right to exercise that option contract. The put writer must honor it.

Eventually, the stock certificates might be declared null and void and the stock price drop toward zero. If so, the call options expire worthless and the put options settle for cash. The put owner can exercise the options and receive cash equal to the difference between the option's strike price and the stock price.

Of course, situations can vary. The best source of information regarding a specific holding is your broker. The next reliable source is the Options Clearing Corp. (OCC). Its website will contain information regarding contract adjustments from bankruptcies and other unusual situations. The web address is www.optionsclearing.com.