If You're Caught Holding Halted Options
I own some put options on a stock. What happens if the stock is halted for trading? Of course, I know that the options won't trade. But assuming that a halt continues through option expiration this month, can I exercise my put option into a short with the stock halted? Someone told me that I was at risk because if I can't exercise the option because of the halt, then my option, although it is in the money, will expire worthless. Is that true?
A great resource for finding answers and information on just about anything to do with options is the Options Industry Council Web site. If you have a specific question, especially regarding trading procedures and rulings, you can telephone 1-800-OPTIONS and pose your question to a live OIC staff person. I made that call and received the following answer to the question above.
"When a stock is halted trading for any reason, the related options are also halted. But the right exercise remains intact," said Jeff Huddlyston of the OIC.
The reasoning for allowing the exercise of an equity option (remember most equity options are American-style and can be exercised at any time prior to expiration) is rooted in the fact that an option is deemed a binding contract and as such the buyer retains all the rights, and the seller the obligations, that are implicit in that contract.If an exchange or regulatory body were to nullify, restrict or greatly alter that right, such as through an extension of the expiration date, it would constitute a breach of contract and a violation of the original terms of the agreement between the buyer and seller. Note that an options contract does not guarantee the right or obligation to buy or sell (trade) at all or any time during the life of the contract.
What to DoOf course, if a stock is halted pending news and doesn't reopen through the Friday of expiration (equity options cease trading the third Friday of the month but don't technically expire until Saturday) the owner of an option can be faced with a very difficult decision: to exercise or not to exercise. In some cases there might be sufficient information regarding the halt to give the holder a pretty good handle on whether the stock is likely to reopen significantly higher or lower. That, of course, would determine the merit of exercising the option. In fact you could conceivably have enough information that it would make sense to exercise a put that was well out of the money when trading was halted if you are fairly confident that the stock will reopen significantly lower, causing that put option to move into the money. That is a highly risky move, though, because there's the risk that the market, especially when given time to reassess all the ramifications of the event that caused the trading halt, will not respond as initially expected.
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