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Informed Option Trading around Merger Announcements

50 Pages Posted: 12 Jul 2008  

Xuewu Wesley Wang

University of Oklahoma - Division of Finance

Date Written: July 12, 2008

Abstract

This paper examines option trading prior to significant information events. Using a broad sample of merger announcements, I find that there is abnormal option trading prior to such announcements after controlling for merger characteristics. This abnormal option trading is mainly concentrated in short-term and at-the-money options. Trading volume in these options leads stock market order imbalances and strongly contributes to the pre-takeover stock price runup. Implied volatility spread calculated from these options is strongly positively associated with the abnormal option volume. Finally, I also investigate whether option trading volume can be used to predict takeover targets. I find strong predictive power of option volume for takeover targets.

Keywords: Informed Trading, Options Market, Merger Announcements

JEL Classification: G10, G12, G14

Suggested Citation

Wang, Xuewu Wesley, Informed Option Trading around Merger Announcements (July 12, 2008). Available at SSRN: https://ssrn.com/abstract=1159206 or http://dx.doi.org/10.2139/ssrn.1159206

Xuewu Wang (Contact Author)

University of Oklahoma - Division of Finance ( email )

307 West Brooks Street
Room 205A
Norman, OK OK 73019
United States

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