This is a hypothetical question. Let's say I believe XYZ is in real financial trouble, so I purchase some seriously OTM put options on the cheap. Before the expiration, XYZ goes bankrupt and their stock becomes worthless. Are my put options also now worthless?
If they were call options I can see that yes, they would be worthless because I own a right to overpay for someone else's garbage shares and I just wouldn't. But if I owned a put, someone else has an obligation to overpay for my garbage shares, and I'd certainly want to collect on that obligation.
On one hand, I'd think the options would be worthless because if XYZ is bankrupt, I couldn't physically buy the 100 shares I'd need to pawn off on the loser that promised to pay me for them. But on the other hand, I couldn't buy an option so far out of the money because no one would sell it to me, making me think they wouldn't be so worthless after all.
So what would happen in this scenario?