Explore Your Options  |  DEC 2005

Explore Your Options by Tom Gentile

Stocks & Commodities V. 23:12 (42): Explore Your Options by Tom Gentile Got a question about options? Tom Gentile is the chief options strategist at Optionetics (www.optionetics.com), an education and publishing firm dedicated to teaching investors how to minimize their risk while maximizing profits using options. To submit a question, post it to our website at http://Message-Boards.Traders.com. Answers will be posted there, and selected questions will appear in a future issue of S&C. OPTIONS AFTER BANKRUPTCY How does the bankruptcy of a company affect its options contract? Do all the options expire worthless? When a company files for bankruptcy protection, some options may expire worthless, but not always. After the company files, the first step is delisting; stock is often delisted from the exchanges within days, if not the same day of the announcement. In rare instances, it takes longer. For example, Delta Airlines (DAL) filed for bankruptcy in mid-September, but shares continued trading on the New York Stock Exchange (NYSE) for several weeks. The NYSE recently announced it would delist the stock on October 13, 2005. Once the shares are removed from the exchanges, the stock begin trading on the OTC Bulletin Board, or “pink sheets.” The stock symbol changes, but shares continue trading and can be bought and sold. At that time, however, the options are affected. To be specific, once the stock is delisted, options can be closed out, but no new positions can be opened. However, it is possible to institute closing transactions. If, for example, an investor owns puts, that position can be closed out even after the stock is delisted.

by Tom Gentile