Practical Applications of Returns to Option Strategies Following Class Action Lawsuits

In Returns to Option Strategies Following Class Action Lawsuits, from the December 2019 issue of The Journal of Investing, authors Dean Diavatopoulos (Seattle University), Andy Fodor (Ohio University), and Kevin Krieger (University of West Florida) propose that markets underappreciate the dichotomous nature of resolutions to class action lawsuits. The authors explore explicit trading in option positions to determine the possibility of capitalizing on the volatility framework caused by class action lawsuits. They find consistent, positive, and frequently significant returns from holding straddle and strangle option positions over 6-month to 1.5-year horizons after a firm is targeted in a class action. Finally, the authors confirm that their results are not driven by positions formed before large market swings but by the nature of class actions. TOPICS: Legal/regulatory/public policy, volatility measures, options