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Straddle Option Profitability in Corporate Lawsuits

Colorado College Working Paper No. 2007-03

13 Pages Posted: 7 May 2007  

Erica A. Wind

Colorado College - Department of Economics and Business

Judith A. Laux

Colorado College - Department of Economics and Business

Date Written: May 2007

Abstract

The current study investigates whether abnormal returns may be gained by purchasing a straddle position prior to a verdict or settlement announcement in a lawsuit. The basis for the hypothesis stems from behavioral finance - more specifically, the Overreaction Hypothesis. Using CAPM expected rates of return and comparisons of 31 lawsuit firms' straddle returns, three new straddle trading strategies are devised. Within the sample of lawsuits, abnormal returns are evident for the three strategies. The results and their implications support behavioral finance and the Overreaction Hypothesis and thus refute the Efficient Markets Hypothesis.

Keywords: straddle, lawsuit, CAPM, overreaction hypothesis, efficient markets

JEL Classification: G14, K2

Suggested Citation

Wind, Erica A. and Laux, Judith A., Straddle Option Profitability in Corporate Lawsuits (May 2007). Available at SSRN: https://ssrn.com/abstract=984491 or http://dx.doi.org/10.2139/ssrn.984491

Erica A. Wind

Colorado College - Department of Economics and Business ( email )

14 E Cache La Poudre Street
Colorado Springs, CO 80903
United States
719-389-6927 (Fax)

Judith A. Laux (Contact Author)

Colorado College - Department of Economics and Business ( email )

14 E Cache La Poudre Street
Colorado Springs, CO 80903
United States
7193896414 (Phone)
7193896927 (Fax)

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