Stocks & Commodities V. 25:2 (38): Explore Your Options by Tom Gentile

Stocks & Commodities V. 25:2 (38): Explore Your Options by Tom Gentile
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Stocks & Commodities V. 25:2 (38): Explore Your Options by Tom Gentile

Got a question about options? Tom Gentile is the chief options strategist at Optionetics (www.optionetics.com), an education and publishing firm dedicated to teaching investors how to minimize their risk while maximizing profits using options. To submit a question, post it to our website at http://Message-Boards.Traders.com. Answers will be posted there, and selected questions will appear in a future issue of S&C.

PUTS AFTER BANKRUPTCY

I own January 2009 puts in a company I feel will be bankrupt in the near future. I have received conflicting responses from traders to this question: What happens to the puts of an underlying company that announces bankruptcy? Is the put writer still obligated to buy shares of the worthless stock at the strike price? Some have said trading in the underlying halts and all the options become worthless. Is that true?

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, letís 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.




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