RT Journal Article
SR Electronic
T1 Returns to Option Strategies Following Class Action Lawsuits
JF The Journal of Investing
FD Institutional Investor Journals
SP joi.2019.1.109
DO 10.3905/joi.2019.1.109
A1 Dean Diavatopoulos
A1 Andy Fodor
A1 Kevin Krieger
YR 2019
UL https://pm-research.com/content/early/2019/10/24/joi.2019.1.109.abstract
AB 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, optionsKey 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.