Was There Abnormal Trading in the S&P 500 Index Options Prior to the September 11 Attacks?

Abstract

After the September 11 attacks, several major newswires reported that there were insiders who tried to profiteer from the options market in anticipation of the event. We use the Student’s t-statistics and several non-parametric statistics to test whether there was abnormal trading in S&P 500 (SPX) index options prior to the September 11 attacks. Our findings from the out-of-the-money (OTM), at-the-money (ATM) and in-the-money (ITM) SPX index put options and ITM SPX index call options lead us to reject the null hypotheses that there was no abnormal trading in these contracts prior to the September 11 attacks. We also find evidence consistent with three bearish speculation strategies, namely the Put Purchase strategy, the Put Bear Spread strategy, and the Naked ITM Call Write strategy. In addition, we conclude that there is evidence of abnormal trading in the September 2001 OTM, ATM and ITM SPX index put options immediately after the 9-11 attacks. We also employ the CBOE VIX to confirm the conclusion drawn from the call and put options. This, in turn, is consistent with insiders anticipating the 9-11 attacks.

Keywords: 9-11 Attacks, Put Options, Call Options, SPX Index, Student’s T-Statistics, Non-Parametric Statistics