Ask Our Pros: Puts and Bankruptcy

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Reader:

What happens if you hold puts on Delphi (DPH Quote) stock and the company goes bankrupt?
-- M.H.

Steven Smith:

Puts will continue to trade as long as the stock does. Remember that many stocks continue to trade even after the company declares bankruptcy. They can hold some value for quite a while.

The puts will be priced based on the stock price. Eventually, if all share value is wiped out and the stock goes to zero, the puts will reflect that. That is, a $5 put will be worth $5. Ultimately, you can exercise these puts, effectively selling the stock at $5, and have no need to buy back or cover the short position.