What happens to Fannie and Freddie "put options" if the government wipes out the common stock in a bailout?

Question

I bought put options on Fannie and Freddie. What happens to the put options if I don't get a chance to "close them" before the common stock goes to zero? Do they become worthless?

Answer 1

The Put option prices depend on the stock prices.  And since the relationship is inverse.  The Put options would be worth an awful lot of money, when the stock prices go down to zero.

http://www.investopedia.com/terms/p/p**o...

Also, when in-the-money stock options expire.  Then your stock broker automatically exercises them on your behalf.  And the money goes into your brokerage account.

http://www.888options.com/help/faq/exerc...

Answer 2

They will expire worthless.

That is why the stock market peaks and valleys so much with stock decliners.  Cause when the stock gets low enough there is an infusion of purchases to cover the short sales, or put options.

So I would go ahead and cover your puts before it's too late.

Then again I could be incorrect.

just my two cents.

Answer 3

No, they'll worth the strike price.

When you bought put options, you bought a contract that obligates the originator of those options to purchase the shares at strike price before the expiration date if you order him to do so (by excersizing the contract). What the underlying shares are worth is the originator's problem. Even if the entire Freddy and Fannie are evaporated by a nuclear blast, the contract is still in force.

Edited for spelling

Answer 4

As long as the stock exists, even if it goes to zero value, nothing will happen to your put options. You would still be able to buy the stock (for a fraction of a cent) and sell it by exercising the option.

If the stock is really "wiped out" and no longer exists, the options will be adjusted to be cash-settled options. If that happens you will be able to exercise the options and receive cash equal to the strike price.