Option Trading Activity, News Releases, and Stock Return Predictability

We examine which categories of option trading volume carry information about future stock prices around corporate news announcements. We predict and find that purchases of options are informative on news days and ahead of unscheduled events but not before scheduled events, and sales of options predict returns only ahead of scheduled news releases. Therefore, while the arrival of new information is an important reason why option volume predicts stock returns, this relation depends on whether the information is scheduled or unscheduled because only the former affects volatility and thus option prices. We also study how trading costs and margin costs affect ex post profitability around news.

Keywords: option trading, news releases, stock return predictability

JEL Classification: G12, G14

Suggested Citation: Suggested Citation

Weinbaum, David and Fodor, Andy and Muravyev, Dmitriy and Cremers, K. J. Martijn, Option Trading Activity, News Releases, and Stock Return Predictability (August 15, 2022). 11th Annual Mid-Atlantic Research Conference in Finance (MARC), 28th Annual Conference on Financial Economics and Accounting, Management Science, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2544344 or http://dx.doi.org/10.2139/ssrn.2544344