Options Trading on Delisted Stocks
What happens to option positions when the underlying stock is no longer trading? That is the question facing thousands of traders who invested in options on failed banks and other companies that have been delisted.
Delisting and Options Trading: What Happens to Options?
When a stock is no longer trading, it is said to be “delisted.” This can happen for a variety of reasons, including bankruptcy, mergers and acquisitions, or regulatory action. When a stock is delisted, it can no longer be traded on any of the major stock exchanges, such as the NYSE or NASDAQ.
Options Contracts and Delisted Stocks: Impact on Options Holders
Options are contracts that give the holder the right, but not the obligation, to buy or sell a stock at a specific price, known as the strike price, before a certain date, known as the expiration date. When a stock is delisted, options traders may find themselves in a difficult situation, as the value of their options contracts may be significantly impacted.
When a stock is delisted, options trading on that stock typically ceases. This means that options holders are no longer able to buy or sell their options on the open market. However, they still have the right to exercise their options if they choose to do so. If they do exercise their options, they will either receive or deliver the underlying shares of the stock at the strike price.
Expiration Date: Options Traders Face a Difficult Decision
In the case of options on American banks that failed in March 2023, the expiration date has arrived, and options traders are now faced with the decision of whether to exercise their options or let them expire worthless. This can be a difficult decision, as the value of the underlying shares may be impossible to determine. In some cases, the underlying shares may have been sold to another company or liquidated entirely.
Risks of Options Trading on Delisted Stocks
It is important to note that options traders should always be aware of the risks associated with trading options, including the possibility of losing their entire investment. This is especially true in cases where the underlying stock is delisted, as the value of the options contracts can be difficult to determine.
Where To Go For Help?
If an investor is holding options on a stock that is no longer trading, it’s important for them to consult the exchange rules that may pertain to their option position. This can be done by reviewing the options exchange rulebook where the options were traded. Click here for a link to the CBOE rulebook.
The exchange will be able to provide information on their rules and regulations regarding delisted stocks, and how they may impact an investor’s options position.
Alternatively, an investor can consult the Options Clearing Corporation (OCC) website, which is responsible for clearing all exchange-traded options in the US. The OCC provides information on its website regarding options trading on delisted stocks, including rules for trading, exercise, and expiration.
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