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I own Jan-2020 put options on a company in bankruptcy, but the stock is trading between .25 and .50 and my limit orders to sell those puts are not getting filled yet. The trading on the shares has not been halted. I am not sure if I need to feel some urgency about selling those puts or whether I am fine to wait for the price that I want. The stock has started trading with a new symbol with a Q added to the end.

This particular case is in chapter 11 and "The cases are pending before the Honorable Robert D. Drain, and are jointly administered under Case No. 18-23538." I am also interested in knowing about the situation for chapter 7 for future knowledge.

The Options Clearing Corp says: "If a company files for bankruptcy and the shares still trade or are halted from trading but continue to exist, the options will settle for the underlying shares. If trading in the underlying stock has been halted, trading on the options will be halted as well."

Do others have experience with owning puts in stocks of companies in bankruptcy which would indicate reasons to close the position quickly even if I need to leave a little gain on the table? Do options tend to remain active or do they frequently get halted?

I would like to close the position in December-2018 or Jan-2019. Am I in any real danger of the halting of trading and having to wait until the options expire in Jan-2020?

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There is always a risk that a company in bankruptcy proceedings can be halted for trading. As long as the stock continues to trade, so will the options. Options may be delisted from trading but all that means is that no future expirations will be added and the current ones will play out as long as the company continues to exist.

If the company goes bankrupt and ceases to exist, you'll receive full value for your puts. The risk you face is:

  • the company reorganizes successfully and share price increases
  • another company decides to buy your company at a higher price

Deep ITM puts on 25-50 cent stocks tend to have wide B/A spreads that take a large haircut to sell to close. If that's the case here, exercise can avoid the haircut. As an example, consider AAU trading at 50 cents. The July $2.50 put is $1.50 x $2.55. That put has $2.00 of intrinsic value but you can only get $1.50 at the market for a haircut of 50 cents. You could try to sell at a higher price but you're never going to get the full intrinsic value because there's no incentive for anyone to give you it. Buy the shares for 50 cents and exercise your $2.50 put, netting $2.00 from it (less what you paid for the put). Similarly, the July $5 put is $4.00 x $5.00 with a 50 cent haircut.

What to do now depends on how much gain you have on your puts as well as what the quotes are. If you have a significant gain and you are chasing only another 25 cents then I'd close the position. Why wait 13+ months for the last 25 cents?

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  • I thought that a put was just the right to sell the underlying at the strike. If underlying co goes bankrupt and you do not actually own any of the underlying, how are the puts at the full value (when you have no underlying to sell at the strike)?
    – lampShadesDrifter
    Mar 20, 2020 at 22:01
  • The Options Clearing Corp guarantees delivery and settlement of all options.
    – Bob Baerker
    Mar 20, 2020 at 22:20

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