Option Trading and Earnings News Dissemination
Charles M.C. Lee
Stanford University - Graduate School of Business
Kaushik I. Amin
Option market activity increases by more than 10% in the four days before quarterly earnings announcements. We show that the direction of this preannouncement trading foreshadows subsequent earnings news. Specifically, we find option traders initiate a greater proportion of long (short) positions immediately before good (bad) earnings news. Mid-quote returns to active-side option trades are positive during non-announcement periods, and are significantly higher immediately prior to earnings announcements. We conclude that option trading facilitates price discovery (the incorporation of information in price) for the underlying security, particularly during the dissemination of earnings news.
JEL Classification: G10, G14working papers series
Date posted: September 10, 1999
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