Returns to Option Strategies Following Class Action Lawsuits

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