Investing / Options idiot - how can I get out of this position?

Question

Long story short, I'm stuck about what to do with puts on an ETF I bought last Friday.

I had a feeling a certain gold mining ETF would dip this week so I took a gamble and bought 175 puts at the strike price of $8 for this weeks expiration. I ended up being right about the dip, however there is an issue that there was a 4:1 reverse stock split over the weekend

The split kind of messed everything up, and I had no idea the spread on the bid/ask would become so drastic, as it was only about 2 cents on Friday, and was about 30-50 cents today. Hard lesson to learn, but my plan of simply trading the option contract doesn't look like it is going to happen.

Unfortunately despite the dip, the highest the bid ever got to today was 35 cents, only 1 cent higher than what I purchased the puts at. I don't know if this will correct over the course of the week now that it's a non standard option. I would really be angry if I had to sell to for only a 1 cent profit (I guess $175 total) despite being right about this

Unfortunately I can't exercise the the option either since I only have 50k cash in the account, so I think the total value is $140k at the strike price I bought it at ($8)

Am I stuck selling for 35 cents (or even less by tomorrow at this point) or is there another option?

My broker, Optionshouse lets me choose how many options I want to exercise, could I exercise an amount I could afford (say 50), immediately cover at market price, then just do that 3 or 4 more times for the remaining contracts?

If that does work, there still is one issue that when I choose the exercise feature, it tells me that the put is out of the money, but I thought that was supposed to adjust based on the split to (strike price before split was 8, shouldn't it be 32 now?). If I do exercise will it basically put me into a short position at $8 while the ETF is trading at $30 currently? If so that'd be a massive loss.

Answer 1

Your broker should make you whole by adjusting the quantity of the underlying (see: http://www.schaeffersresearch.com/education/options-basics/key-option-concepts/dividends-stock-splits-and-other-option-contract-adjustments) but I would check with them that this will happen. You will then have an option on 4 times the underlying for each option. Unless the price has risen in the interim or you bought them after the split was announced you should not make a loss.

Answer 2

My understanding is that all ETF options are American style, meaning they can be exercised before expiration, and so you could do the staggered exercises as you described.

Answer 3

There a lot of confused information in your question so it's impossible for anyone to provide an accurate answer.

When there's a stock split (traditional or reverse), the options adjust accordingly. If the put was OTM before the split, it's OTM after the split. No one exercises OTM options nor would a broker allow you to do so.

If there's time premium remaining in an option, exercising the option throws that time premium away. Sell the option to close in the option market.

The only time that it makes sense to exercise a long option (and take an offsetting position in the underlying if you don't already have one) is when n ITM option's bid is trading for less than its intrinsic value and all attempts at price improvement fail. In such cases, you would stagger the exercise of your puts, especially if there were cash settlement issues.