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What happens if you hold puts on
stock and the company goes bankrupt?
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.
Steven Smith writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from May 1989 to August 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He appreciates your feedback;
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