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Shareholders of Sino-Forest Corp. aren't the only ones with headaches after the Ontario Securities Commission halted trading in the company's shares.



Investors who thought they were buying insurance using "put" options against a decline in the forestry company's shares are facing the prospect that their protection could be worthless.



The option contracts they purchased have been frozen since the OSC issued a cease-trade order Aug. 26 on Sino-Forest stock.

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Last week, the OSC extended the cease-trade order to Jan. 25, 2012. During the four-month break, about 9,000 put options are scheduled to expire. Each put allows the holder to sell 100 shares at a predetermined price.

Last week, the OSC extended the cease-trade order to Jan. 25, 2012. During the four-month break, about 9,000 put options are scheduled to expire. Each put allows the holder to sell 100 shares at a predetermined price.



Many Sino-Forest investors used put options to buffer themselves against the possibility of a plummeting stock price.



For instance, an investor who bought Sino-Forest shares at $20, and also purchased puts that give him the right to sell these shares at $15, would only lose the difference between the two prices, plus a small cost for buying the puts, if the shares fall.



If no put was purchased, the investor would have to write down his investment to $4.81, the price at which trading in the stock ceased in Canada.



The same would be true if an investor bought a put option but the OSC rules it can't be exercised.



The issue first flared up on Aug. 26 when the Canadian Derivatives and Clearing Corp., which oversees options trading in Canada, announced that Sino-Forest options could not be exercised while trading in the stock was halted. That rattled investors who held put contracts that were now frozen.

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After discussions with the investors, the CDCC filed a request with the OSC asking for permission to allow some investors to exercise the options.



It is requesting special treatment for contracts that were purchased as protection against a long position in the shares. That means anyone who bought puts purely for speculative purposes will still be out of luck if the OSC approves the request.



The OSC has scheduled a hearing for Wednesday.

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