Returns to Option Strategies Following Class Action Lawsuits

(2019) The Journal of Investing 29(1), 119-131.

Posted: 20 May 2020

See all articles by Dean Diavatopoulos

Dean Diavatopoulos

Seattle University

Andy Fodor

Ohio University

Kevin Krieger

University of West Florida

Date Written: October 1, 2019

Abstract

Turmoil and uncertainty confront firms when they are named as defendants in class action lawsuits. In this article, we consider whether option markets interpret the implications of these dramatic corporate events for mid-to-long term performance. In particular, we consider relatively simple, long, volatility-based combined option positions. We find consistent, positive, and frequently significant returns to option straddle and strangle positions held from six months to 1.5 years after a firm is targeted in a class action. This may be indicative of under appreciation, in the option markets, for the dichotomous nature of firm stock price performance as the class action proceeds toward a resolution.

Suggested Citation

Diavatopoulos, Dean and Fodor, Andy and Krieger, Kevin, Returns to Option Strategies Following Class Action Lawsuits (October 1, 2019). (2019) The Journal of Investing 29(1), 119-131., Available at SSRN: https://ssrn.com/abstract=3583226

Dean Diavatopoulos (Contact Author)

Seattle University ( email )

901 12th Avenue
Seattle, WA 98122
United States

Andy Fodor

Ohio University ( email )

514 Copeland Hall
Athens, OH 45701
United States
740.593.0259 (Phone)

Kevin Krieger

University of West Florida ( email )

11000 University Parkway
Pensacola, FL 32514-5750
United States

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