Analyzing Abnormal Call Option Returns Around Mergers and Acquisitions Announcements Using the Black-Scholes Option Pricing Model

The use of stock options and other derivatives have become increasingly common in today’s market. Both in terms of use by investors or traders, as well as in their use as a form of stock based compensation by companies who are trying to align the interests of the employees with the interests of the company, and in turn, increase the stock’s price. As such it is important to understand how the value of these options changes around movements in the stock price, or other events surrounding the company. The primary focus of this paper will be on the announcements of mergers and acquisitions and how that can impact call option pricing. This paper will use the Black-Scholes option pricing model as well as the binomial pricing model introduced by John Cox, Stephen Ross, and Mark Rubinstein, to analyze the abnormal option returns immediately following merger and acquisition announcements