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Refco puts worthless?

  1. 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. 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. 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 tradingmarkets.com.

    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 mohammed.hadi@dowjones.com
  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...
  11. Check with the OCC 1888Options .. often in cases like this they elect to do have the exchanges do a closing only rotation on expiration Friday(s). That way you may get an exiting closing price without the need to exercise.
  12. Is Ned Bennett, COO of optionsXpress related to Phil Bennett of REFCO?

  13. u can use the stk cert as toilet papers.
  14. LOL, how can you have a closing rotation if the underlying stock is not trading?
  15. You use all the available nonprimary market data and establish a price. You don't have to trade there, you can still exercise. In effect you let the options market create an implied price.
  16. Good luck in finding any market maker who would make a two sided market in Refco options without the underlying trading.

    In fact, good luck in finding any market maker who would make a two sided market in ANY option without the underlying trading. Sorry, but no rational person or entity would do this because there is no way to lay off the risk.
  17. I'll make a two sided market in anything, but you might not like the spread. :D
  18. my guess is that a market would have to be made on the shares in order to settle outstanding obligations, even if it's 0 bid at $.05.

    a company's shares don't cease to exist simply because it's broke and tangled up in liability. the market decides the value, even if it's the Pink Sheets.

    frankly, I have no clear understanding of why the stock is still halted, except that someone somewhere with some pull wants it to be.
  19. can someone explain to me what the average time after IPO date in the last yr or last few yrs that there are listed options on it trading?

    does this have something to do with
    market cap ?

    also ... does anyone know if in RFX there were suspicious
    trades volume wise or open interest wise was there alot of put vs calls out there at any one strike ( s )
  20. Thats weird, they have an IPO and have options right off the bat. Doesnt make sense. Usually you have to wait 3-6 months before the options trade, from what I have seen. When did GOOG options start trading after the IPO?
  21. It is my understanding that if you bought puts you have no one to assign them to, they will expire worhtless...
    I understand that the calls I wrote upon expiry I will be credited the funds as the funds are deposited in your account upon writting them and credited upon expiry..
    I understand that the calls written need no one to assign to as they become zero based upon currnet last price..

    Will let you know next wk.

    I have written to the broker and not had a written response.

  22. Since Refco is trading in the $1 range, all listed call options are out of the money and all listed put options are in the money.
  23. You definitely have someone to assign puts to when you buy them...the party that sold them to you. That's exactly what you want to happen if you bought puts. Why on earth would anyone buy puts if they became worthless once the company hit the absolute bottom price....$0?

    If the stock happened to still be halted, like RD currently is, there are still 2 counterparties to the contract written. The OCC is the one who decides what the price is going to be to settle the contracts. Whether or not the person writing the contract was covered is irrelevant of this settled price.

    For mergers, the options become cash settled. The same could happen to stocks that are halted.

  24. Lets say hypothetically, what if that party was REFCO itself. How do you assign puts to someone in bankruptcy?
  25. :eek:

    That's counterparty risk pure and simple...

    I'm just guessing on this but I'd imagine that the puts are unsecured obligations of a bankrupt entity...what are they going to do prevent RFX from trading anymore?

    Anyone who knows otherwise, I'd be interested to hear.
  26. agree it is weird, understand they can offer options early and it is based upon the balance sheet...
    which makes it even more interesting and dirty...

    I contacted my broker re bidu and was told they would not be available for some time and it's ipo is about the same time..

  27. Nah...it wouldn't matter if the guy who sold you the options went bankrupt. The clearing firm's on the hook for that guy and still has to settle with the OCC if they want to remain a member. If you're asking what if the the clearing firm themselves went bankrupt (a la REFCO) then you're dealing with an entirely different issue which isn't the subject of this thread.

    They're asking..how do you settle when the stock's halted? Obviously it doesn't apply here anymore since the stock's trading again, but it could come up again. The options contracts are going to be honored at the exercise prices (if the long holder so chooses) but nothing can really be done about the failure to deliver until the stock begins trading again.

    A long put holder will be short the stock at the exercise price until he can cover. A short option writer is buying the stock at the exercise price and has to wait for delivery before he can sell it, which won't happen until the stock trades again.