What Happens to CIT Group Inc. (CIT) Put Options?

For some time now, CIT Group Inc. (CIT) has struggled to avoid entering into Chapter 11 bankruptcy.  On Sunday, that battle ended as the century-year-old bank holding company moved forward with a prepackaged reorganization plan.  Expectations are for the company to emerge from bankruptcy by the end of the year … I think I heard the same thing about GM…

More News On CIT

• CIT

• Closing Update: DJIA Manages Fourth Straight Positive Finish
  July 27, 2010
• Former Freddie Mac chief joins CIT board
  July 27, 2010
• Sector Update: Financial
  July 27, 2010

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The majority of CIT debt holders support the re-org, which may position the company with a leaner debt load and streamlined capital structure.  While the bond holders may support this decision, the shareholders, who are lowest on the “bankrupt payoff” totem pole, will most likely be completely wiped out.  In other words, as the stock is delisted and eventually ceases trading altogether, their equity will be gone.  Certainly not a positive outcome for the equity holders.  But what of the traders and investors who own puts in CIT?  While their investments may have paid off, now is not the time to be greedy.

The stock traded as high as $6.62 in the past year and options do continue to still trade.  Today is the last day the stock will trade as CIT on the NYSE.

At the end of the trading day, CIT stock will be de-listed from the NYSE and move to its new home,  trading on the pink sheets, an electronic over-the-counter marketplace (pinksheets.com).

I contacted the NYSE and PinkSheets and they informed me that they do not yet have a symbol, but one will be created later today.

Today, options are trading normally. Tomorrow, however, while this stock continues to trade, you will be able to sell your puts in a closing-only transaction. The puts will most likely have a wide bid-ask spread in relation to their price, because of the lack of liquidity as well as the inability to short pink sheet shares as the market makers will need to hedge those trades.

The other scenario is if the courts decide to completely remove the shares from trading all together.  This  scenario may be the ultimate fate of CIT’s existing shareholders.  For an example, we can use the January 5 LEAPS, which are now regular options.

Let’s assume you paid $1.00 for those options late last year.  In this situation, the puts should settle into parity or their intrinsic value upon a complete delisting of the stock altogether.  So if you own the January 5 call, it will be worth its strike price, or $500.00 per contract (because the stock is 0).  This ultimate fate may be months down the road and while you may get a couple extra pennies or nickels if you hold your put options until that point, it may behoove you to sell them now using a limit order.  As you can see by the OptionsHouse options chain, the January options are trading for parity, which means all time value has been removed.

This just in: Here are the trading symbols for CIT Group, effective tomorrow, November 3, 2009:

• CIT Group, Inc. (The) – CIT – NYSE – New Symbol – CITGQ – piggyback qualified for Pink Quote (Common stock)
• CIT Group, Inc. (The) Pfd A – CIT$A – NYSE – New Symbol – CITBQ – piggyback qualified for Pink Quote (Preferred)
• CIT Group, Inc. (The) Perp Pfd C – CIT$C – NYSE – New Symbol – CITDQ – piggyback qualified for Pink Quote (Another Preferred)
• CIT Group, Inc. (The) Units – CIT$Z– NYSE – New Symbol – CITEQ – piggyback qualified for Pink Quote (A type of bond)