Imagine buying puts on a company's stock and seeing the stock price tank day after day, with that put fattening up in value. Then imagine waking up to learn that the company had filed for Chapter 11 bankruptcy protection, with the stock halted on the exchange that listed the stock. What is the value of the put you own?
If trading in the stock has been halted, the Option Industry Council (OIC) reminds traders that trading in the options will also be halted. "If the underlying stock begins trading on the OTC Bulletin Board or on the 'Pink Sheets," you'll be allowed to close out your position, although you can't open new ones, the OIC advises on its educational site. You could also talk to your broker about exercising your option.
But what if trading doesn't open again until after those options have expired? The OIC answers this question, too. As long as the shares "continue to exist, the options will settle for the underlying shares."
However, if a judge cancels the shares, "an investor who exercises a put would receive 100 times the strike price." Nothing would be delivered. If you were the unlucky holder of a call, you'd get nothing. That's what happened to anyone who held calls in Delta Air Lines, the OIC alerts readers.
What if a company announces a one-time cash dividend? What happens to the options? Are they adjusted in some way?
For a list of the latest "Infomemos," traders can go to the Options Clearing Corporation's home page for updates. For example, when Infosys Technologies announced a Special Cash Dividend of about $0.67 per American Depositary Share in October, the Options Clearing Corporation's home page alerted investors that the INFY symbol would become INFY1. The new deliverable per contract would be 100 shares of Infosys Technology plus approximately $67.00 in cash.
Are you confused by all this, and are you in an options trade in which the underlying company has merged with another, declared a one-time-only dividend, gone bankrupt or announced a 2-for-1 stock split? You can search for the needed information on the Option Clearing Corporation's website. If you're still confused, their educational arm provides live chat. This can be accessed through the OIC Education website until 3:30 p.m. CT every trading day. They also can be reached by telephone, with the current telephone number available on that site.