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Returns to Option Strategies Following Class Action Lawsuits

Dean Diavatopoulos, Andy Fodor and Kevin Krieger
The Journal of Investing December 2019, joi.2019.1.109; DOI: https://doi.org/10.3905/joi.2019.1.109
Dean Diavatopoulos
is an assistant professor of finance at Seattle University in Seattle, WA
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Andy Fodor
is a professor of finance at Ohio University in Athens, OH
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Kevin Krieger
is a professor of finance at the University of West Florida in Pensacola, FL
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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.

TOPICS: Legal/regulatory/public policy, performance measurement, volatility measures, derivatives, options

Key Findings

  • • Long, volatility-based straddle and strangle option positions are a potentially profitable strategy if stock markets fail to appreciate the dichotomous nature of price movements after class action lawsuits begin.

  • • Straddles and strangles are consistently profitable for holding periods between six months and 1.5 years if created after the initial filing of a class action lawsuit.

  • • The median time from the initial filing of a class action lawsuit until resolution is 717 days.

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The Journal of Investing: 30 (2)
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Returns to Option Strategies Following Class Action Lawsuits
Dean Diavatopoulos, Andy Fodor, Kevin Krieger
The Journal of Investing Oct 2019, joi.2019.1.109; DOI: 10.3905/joi.2019.1.109

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Returns to Option Strategies Following Class Action Lawsuits
Dean Diavatopoulos, Andy Fodor, Kevin Krieger
The Journal of Investing Oct 2019, joi.2019.1.109; DOI: 10.3905/joi.2019.1.109
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