New to trading options. Need advice on Put option now in bankruptcy

[JSOP]

I've never done it and no one talks about it, even in books, but if I bought puts on a stock and I want to exercise them, why do I have to buy stock before the exercise? Shouldn't I be able to exercise the puts directly and what would happen next is that I will be assigned actual short shares in my account? Then, if I choose, I can hold the short in the stock or buy it back. If the company then goes under, I keep the full amount of the short (100% gain).

All these buy side call/put contracts are linked to actual shares, right? As a holder of either them, I have the right (but not the obligation) to exercise them at anytime I choose, regardless of the correctness as it relates to profitability, and it should have nothing to do with what stock of that same company I happen to have in my account [Yes, I understand that an exercise of puts when you're holding the underlying assigns those shares to someone else].

If any of this is wrong, please correct me. It's the writer of calls and puts who have no control of exercise. The buyer has all of the control, having nothing to do with current ownership of the underlying stock and has paid a premium for that right.

You don't have to buy the shares before exercising puts if you don't want to and yes if you exercise the puts without the shares called nake puts you will be short in your account. Two things can happen with this: 1) If there is not enough or no available shares to be shorted, you will have to close the short position right away after exercising the puts and you will have to buy in the market anyway to close the position and that leads to 2) By the time when you buy the shares, the price might have gone up and you might be potentially short-squeezed. Nobody knows what can happen with the company. If this is just a Chapter 11 reorganization, the company can do something like debt restructuring and can still survive especially if it gets some white knight that comes in to buy the company, the share price can spring back up to its previous level and you would be short-squeezed or at least lost some of the profit.

In short (no pun intended), buying the shares first now at cheaper price just makes sure you are covered and locks in at least majority of the profit. Sure the share price can go to zero and you get 100% of the gain but what if it doesn't? And besides, unless you bought huge amount of shares like at least hundred's of K's of shares, you are not going to miss much.

 

[roeco89]

I'm quickly figuring out I may be in a little over my head. Very overwhelmed and confused with everything. So if I bought the $1 put option expiring on May 17 for .62, is selling my option monday morning still my best strategy? Also is there something I should set-up, like an auto-sell when the market opens or should I wait awhile monday before selling?

Again thanks for everything and sorry for being such a rook

 

[ETJ]

It's a prepackaged bankruptcy. Terms are out. New equity is going to the debt holders. It appears it will be in OCC's hands.

 

[roeco89]

It's a prepackaged bankruptcy. Terms are out. New equity is going to the debt holders. It appears it will be in OCC's hands.

Could you elaborate a bit more on what exactly that means.. How do I know or find out what to do with the option?

Thanks for your help

 

[SteveH]

No one said this. You can exercise your options whenever you want as long as you have the margin fo the stock. If the OCC determines there is no common, like in a full bankruptcy (This happened with GM Options) they get cash settled.

Robert, a person above my post "said this" and that is who I was referring to.

Still, you read the option books and they don't mention that you can exercise puts to have a short position or get cashed out if no shares are available to borrow. It should be stated by all of them in their books for completness on the subject.

There have been posts to ET, complaining that their deep ITM puts don't seem to have a market to trade, given what they see in the bid/ask quotes. Some brokers may even show no bid/ask or no price at a 1 delta. This is why I mentioned it as another choice for the OP.

 

[lightninboy]

Take the money and run. It's just a matter of figuring out the best opportunity without botching it and letting the opportunity slip away.

 

[qwerty11]

I'm quickly figuring out I may be in a little over my head. Very overwhelmed and confused with everything. So if I bought the $1 put option expiring on May 17 for .62, is selling my option monday morning still my best strategy? Also is there something I should set-up, like an auto-sell when the market opens or should I wait awhile monday before selling?

Again thanks for everything and sorry for being such a rook

I wouldn't rush too much. Just give it some thought on monday and look at the market carefully before you do anything. Let the market hit you (on offer).

 

[roeco89]

Take the money and run. It's just a matter of figuring out the best opportunity without botching it and letting the opportunity slip away.

By take the money and run... Do u mean sell my option Monday? If so should I look to sell it immediately when market opens?

Thanks for your help

 

[lightninboy]

Not necessarily. It's just that sometimes like when PCG crashed in January if you wait too long the price goes back up.

 

[roeco89]

Can somebody please help me understand why my option went straight down to .01 when market opened? I thought I was in a good position? Please lend some advice. Looks like there's no activity on the stock at all. Not sure what to do here.