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mkingsley

Put Options - Chapter 11 Bankruptcy

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Good Morning Everyone:

I am relatively new to stock options, and have an interesting situation. Last week, I purchase a put option on Hertz stock. I purchase 3 contracts for .18 with a strike price of $1, expiring on 19 JUN 20. They just declared bankruptcy (chapter 11) on Friday. I am a little confused what will happen now and what I should do.

I have never watched closely what happens to the stock price based upon a filing of chapter 11, but in looking at some recent examples, JCP for example, is now trading on the OTC for $.18. Am I to assume that HTZ stock will be switched over to the OTC, and not go down to $0, but trade at 10-20 cents?

I had read this on another site when researching this:

If you own put options on stocks of a company that has just declared or filed for bankruptcy, you are in for your maximum potential reward. Whoever sold you that right to sell shares of that company at that higher price is obliged to fulfill that obligation, so your profit is guaranteed.

A few questions I have, that maybe others might find useful in getting answered for the future if they are also in this situation:

  1. How would I get the maximum profit if the stock still trades at $0.10 - $0.20 on the OTC?
  2. Is it better to trade it now, or wait until the price drops even more?
  3. I had a strong hunch that this was going to happen and be announced over this weekend....would it of been more profitable to buy options closer to expiring...29 May 20 vs the 19 JUN 20?

 

Thanks in advance for shedding light on how Bankruptcy affects options.

 

-Michael

 

 

 

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47 minutes ago, mkingsley said:

Good Morning Everyone:

I am relatively new to stock options, and have an interesting situation. Last week, I purchase a put option on Hertz stock. I purchase 3 contracts for .18 with a strike price of $1, expiring on 19 JUN 20. They just declared bankruptcy (chapter 11) on Friday. I am a little confused what will happen now and what I should do.

I have never watched closely what happens to the stock price based upon a filing of chapter 11, but in looking at some recent examples, JCP for example, is now trading on the OTC for $.18. Am I to assume that HTZ stock will be switched over to the OTC, and not go down to $0, but trade at 10-20 cents?

I had read this on another site when researching this:

If you own put options on stocks of a company that has just declared or filed for bankruptcy, you are in for your maximum potential reward. Whoever sold you that right to sell shares of that company at that higher price is obliged to fulfill that obligation, so your profit is guaranteed.

A few questions I have, that maybe others might find useful in getting answered for the future if they are also in this situation:

  1. How would I get the maximum profit if the stock still trades at $0.10 - $0.20 on the OTC?
  2. Is it better to trade it now, or wait until the price drops even more?
  3. I had a strong hunch that this was going to happen and be announced over this weekend....would it of been more profitable to buy options closer to expiring...29 May 20 vs the 19 JUN 20?

 

Thanks in advance for shedding light on how Bankruptcy affects options.

 

-Michael

 

 

 

The options exchange guarantees the delivery. You stand to make the maximum which is not 100% simply the difference between the OTC price and the 1$ strike. You will buy at 5c or 10c - exercise the option at 1$ and come out ahead whatever is left over minus your premium paid. Seems like a good deal.

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Thanks for the reply.

 

I am still confused and still have those questions above, but I'll post back as I watch the price this morning and also post what happens to the premium price, just for some notes for anyone this may help.

It's an interesting situation that I've never been a party to, so it's a learning process and hopefully it helps others.

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You will find that trading the options will be hard and the spread could be big. Hence the advice to go the route of exercising. Your other questions are either impossible to answer (could the price go lower - I mean yeah it might but usually those stocks keep trading in the nickel and dime range) - the expiry doesnt make a difference. The company will issue new shares, the options relate to the old shares.

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If it's me, i would try to work my order to close the position slowly.

It's not worth the trouble of exercising and being short a stock that might be delisted, and hence you are at the mercy of your broker being able to find stocks to borrow and you might pay exorbitant rates.

You can search recently the LFIN options fiasco, but i'm sure there are other examples.

https://www.barrons.com/articles/getting-caught-short-1523065469

http://archive.is/hvNTB

In my opinion, mot worth the effort or the risks for just 3 contracts. Try to salvage what you can and move on (not sure which broker you use, but you need to take into account the commissions + exercice fees, and the other costs).

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I see HTZ started trading again and current stock price is around $0.70,  so @mkingsley  Jun19 1 strike are worth $0.45 now.   Rather than going through assignment, probably best to sell the puts and enjoy a nice dinner compliments of HTZ.   I'm sure it won't get close to zero by Jun19 expiration, as its range was $0.40 to $1.47 today

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Good Morning.

 

Thanks to everyone for the replies. I am letting this play out because I want to see what happens over the course of this week. As mentioned, the stock did drop yesterday, not to $0, but to $.60. The put options that I bought now have a bid of $.50. My assumption was incorrect in that I thought I would get maximum profit. I'm ITM, but not as much value as I initially thought.

 

It's interesting to note that in premarket this morning, HTZ stock is trading up 50% at $.86 a share.

 

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20 hours ago, Djtux said:

If it's me, i would try to work my order to close the position slowly.

It's not worth the trouble of exercising and being short a stock that might be delisted, and hence you are at the mercy of your broker being able to find stocks to borrow and you might pay exorbitant rates.

You can search recently the LFIN options fiasco, but i'm sure there are other examples.

https://www.barrons.com/articles/getting-caught-short-1523065469

http://archive.is/hvNTB

In my opinion, mot worth the effort or the risks for just 3 contracts. Try to salvage what you can and move on (not sure which broker you use, but you need to take into account the commissions + exercice fees, and the other costs).

I amused myself looking up that LFIN story last night. Apart from the options debacle the whole thing is like the South Sea Bubble all over again. What is even more incredible are the interviews with the CEO both prior to this particular venture, during the LFIN high tide and its collapse. I have rarely heard a more incoherent rambling dude than this Venkata Srinivas Meenavalli, he had another failed business venture before where he lied through his teeth about everything and then just to show how inept the rest of us are he manages to launch a company that basically has nothing in it on the stockmarket which achieves a 6B$ valuation in a few weeks or months.

Here we are on SO busting our chops to net 300$ on a hedged straddle and this numpty is able to buy off prosecution and from what my count is get away with 20M$ more or less he siphoned off the poor dudes that bought his paper. As @Djtux points out even the put buyers were left with massive losses (they were unable to exercise their puts) eventhough the company went bankrupt. What a total disaster.

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I guess I should of sold, since its now OTM again and back down to $.30 Oh well, live and learn I guess. Hopefully this helps others understand with a real world situation.

If anyone has any opinions of what I should do (wait for stock to keep dropping|sell the puts), I'm all ears.

 

Thanks in advance.

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3 minutes ago, mkingsley said:

I guess I should of sold, since its now OTM again and back down to $.30 Oh well, live and learn I guess. Hopefully this helps others understand with a real world situation.

If anyone has any opinions of what I should do (wait for stock to keep dropping|sell the puts), I'm all ears.

 

Thanks in advance.

I see bid ask 0.30 / 0.40.

Why not just try to close at mid 0.35 and move on ?

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