2

I read somewhere online that the US goverment may close the stock market because of Covid2019. Is the upshot the same as a company going bankrupt?

I'm still confused on put options when a company goes bankrupt : stocks

Example:

You own one $10 put option on SNAP

If SNAP goes to $1, than you have the RIGHT to exercise your contract and buy 100 shares for $1 and sell it immediately for $10. If the stock price goes to $0 (in case of bankruptcy) you still have the RIGHT (and the person that sold you the option the OBLIGATION) to buy the shares for $0 so it can be sold for $10 a share.

So, if when SNAP goes bankrupt whom ever wrote you that contract is obligated to give you $1000 dollars, no ifs/ands/ or buts.

Improve this question

1 Answer 1

Reset to default
1

The last sentence is correct but there are some errors in the rest of the explanation.

A long put gives you the right to put the stock to someone else, meaning sell it at the strike price. This is a $10 put so if SNAP goes to $1, you would exercise the put, sell the stock for $10 and then buy it on the market for $1, netting $9 less whatever you paid for the put. This all assumes that the markets are open for trading.

If the financial markets are shut down, I assume that contracts will still be exercisable during a shut down and even if not, the OCC exercises all options at expiration if they are one cent ITM which I also assume would still be done. There might be an issue with ability to sell the stock.

Improve this answer

You must log in to answer this question.