Refco puts worthless?

Discussion in 'Options' started by Julius, Oct 14, 2005.

  1. Julius


    If I would be the happy owner of puts on RFX, but RFX will never trade again, would that mean my puts would expire worthless?
  2. On the contrary,

    If you owned puts and the stock went to 0 -- never traded again -- you would be owed the difference between your strike price and 0.

    What you say is true if you owned calls and the stock goes to 0.
  3. Julius


    so never trade again = 0 even if the options expire before it's sure the stock will never trade again?
  4. I see what you are saying...

    That's up to the CBOE. They might use the last traded price to settle options or they might delay settlement until the situation is resolved...
  5. The owner of the put would exercise them before expiration.
  6. The options don't trade when the stock doesn't trade...

    What price would you exercise them at?

    Who would be your counterparty?
  7. Julius


    ok thanks. I can imagine some people being pissed when puts get settled at last traded price, while company is in bankrupcy ;)
  8. Yep,

    You can't please everyone that's for sure... How would you feel if it took 6 months to settle out though? [unlikely in the extreme I'd think]
  9. Refco's October Puts, Calls Carry Some Unknowns

    October 15, 2005

    Even if Refco Inc.'s stock remains halted, options on the stock that expire a week from Saturday can be exercised.

    But it won't happen automatically, as it usually does, and investors face a number of unknowns when deciding what to do with their options positions.

    The biggest unknown? The stock price. Investors exercising the options are taking it on faith that the shares will open for trading at about where they were halted or last traded. Though this is probably a safe assumption, "you are kind of flying in the dark," said Joe Corona, a former trader and now director of options execution at investor-education Web site

    In addition, without shares changing hands, options investors could get caught up in a mess of unwanted short positions, failed deliveries, and uncertainty about what can be done to resolve the situation -- other than wait for the stock to trade or for lawyers to start duking it out.

    The process for options expiration on a halted stock begins Monday evening, with the Options Clearing Corp. removing the options from its automatic expiration system and notifying its member firms of the move.

    "This gives the firms enough time to contact their customers and ask for a decision on the exercise," said Gina McFadden, senior vice president of the OCC's business operations group.

    That means holders of October options positions should expect to hear from their brokers. Companies such as OptionsXpress Holdings Inc., the online brokerage firm that specializes in options trading, will be sending reminders to investors on Thursday and Friday and, if needed, will contact individual investors who don't respond directly, Chief Operating Officer Ned Bennett said.

    Bottom line, though, is if the stock remains halted and you hold a position in the options, you have a decision to make. In the options market the combinations of positions are virtually endless, but a rundown of the basic scenarios is as follows:

    For owners of calls, exercising means they will end up with Refco shares. Still, they aren't obligated, so it might be best to walk away, having lost only the premium paid for these options. Because it is no longer an automatic expiration, "you don't have to worry about waking up and finding Refco stock in your lap if you don't want it," Mr. Corona said.

    Though it may be unlikely that call holders will exercise their options, if they do choose to call sellers will have to pony up stock. Those who don't already own shares will end up short the stock.

    That isn't necessarily a bad situation to be in, especially for someone who sold a call at a 30 strike, but there could be complications. Typically, shorting a stock involves borrowing shares and then selling that borrowed stock. If a stock can't be borrowed, brokers will effectively force the short-seller to buy the shares back.

    But several traders noted that because Refco's shares are halted it isn't clear that anything can be done about the failure to deliver in this situation, though they are certain that the options themselves will be honored.

    Put buyers might want to exercise their options because this is a great situation to be in for those who already own shares that they can deliver. Those who don't own already shares will be left short the stock as well.

    Put sellers are likely the worst off. Being put the stock means they will end up long the shares, at the puts strike price, and they have no choice but to buy the stock. That said, if Refco's options start trading again before Friday's close they will be returned to the automated options execution system, Ms. McFadden said.

    Write to Mohammed Hadi at
  10. Well,

    That's certainly one way to do it. Since there is no secondary market you just have to take/make delivery of the shares from your acount. Value to be determined at some future date. It makes sense from the OCC point of view as it gets rid of the expiring contract. For everyone else, it's a bit absurd.

    I'd guess they will try to open the stock at least one day before expiry but no one knows for sure...
    #10     Oct 15, 2005