Ask the Institute

DATE: November 26, 2012

QUESTION:

If I own a put option on a company that declares bankruptcy, what happens?

ANSWER:
When a company has the misfortune of declaring bankruptcy, its stock may trade at a price that is very close to zero. Sometimes the market may even anticipate the bankruptcy filing, so the stock price may already be very low. As long as the strike of the put is higher than the current stock price, then the decline in stock price is a good event for the owner of a put. To learn more about owning a put option on a company that declares bankruptcy, view this week's segment of "Ask the Institute."