What happens to PUT options if a bank (or any company, for that matter) declares bankruptcy over a weekend?
Preferred holders, unsecured debtholders, subordinated debtholders, equity shareholders of WAMU essentially got wiped out over the weekend; do PUT option holders lose their "stake"...or will some value be determined at the open on Monday?
Additional Information:
Ooops, sorry gang...I thought today was Saturday!!!
In any case, even overnight, what happens to options holders' money? I noticed "N/A" for all Bid/Ask Strikes for WM at Yahoo! Finance...do they lose their cash as well???
Curious FACES would like to know.
;>)
Best Answer
732 points
alanj answered 2 months ago …
You'd be in good shape. How much would depend at what strike price you purchased your put options at and how much time and volitility they had lost. But they would have increased in value from the previous trading day before filling for bankruptcy.
Here is the answer given at http://www.optiontradingpedia.com/what_happens_to_options_during_bankruptc y.htm
"What Happens To Put Options During Bankruptcy?
If you own put options on stocks of a company that has just declared or filed for bankruptcy, you are in for a huge reward. The delivery and settlement of every stock option is guaranteed by the OCC, Options Clearing Corporation, in the US Market. Whoever sold you that right to sell shares of that company at that higher price is obliged to fulfill that obligation, so your profit is guaranteed. The only question is, what happens when that company files for bankruptcy and trading in its stocks and options are suspended? When that happens, trading of that company's stocks and options moves to the Over The Counter (OTC) market or what is known as "Pink Sheet" market where you are able to either sell those put options for a profit or exercise the options and sell the stocks for the same profit. Since it is the company that is going illquid and insolvent and not the person or institution who sold you those put options, you are guaranteed your profit and delivery. "
Options are a separate market from the actual company stock.
Answers
206 points
DirtyD answered 2 months ago …
Yeah, I'm pretty sure they just become worthless at that point. They're options on equity that might no longer exist once the debt holders take over.
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677 points
Dragonsbane answered 2 months ago …
They don't become worthless! They become worth can amount close to the strike price of the put since the put is essentially the right to sell the stock at the strike price. Even if you can not find a bid for your put (which you should still be able to do). You can purchase that stock for pennies after Chapter 11 is declared and exercise your option to that stock at the strike price of the put.
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106 points
DawnPennington answered 2 months ago …
When a company gets taken over in which you have options and there's no stock
available as a deliverable, it typically winds down to a cash settlement
of some sort, if there's any value to be had.
160 points
Einstein answered 2 weeks ago …
The Put option is secured by the person who sold it to you (the option seller) , they have to buy the stock at the strike price they sold it to you
even if the stock goes to $0. That means if you bought an option for a strike price of $10 and then the under lying stock goes to $0, the option seller has to pay you $10 a share if the stock is put to them by you exercising your option right.
The option seller now owns the stock which has a value of $0 and paid you $10 minus any premium you paid to have the right to the put..... You make out well
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