Information or Speculation: What Motivates Pre-Earnings Announcement Option Activity?

32 Pages Posted: 8 Jun 2011 Last revised: 22 Jun 2011

Dallin M. Alldredge

Washington State University

Benjamin M. Blau

Utah State University - Huntsman School of Business

J. Michael Pinegar

Brigham Young University - Marriott School of Management

Date Written: June 6, 2011

Abstract

Following prior studies that suggest that option volume contains information about underlying stock prices, we examine option activity prior to earnings announcements. Results in this study show that put (call) volume relative to total option volume is higher prior to unfavorable (favorable) announcements. However, we find that the ability of put (call) ratios to predict negative (positive) future returns weakens during the pre-announcement period, thus questioning the level of informativeness of pre-announcement option activity. Interestingly, pre-announcement put ratios are driven by stocks with low last-quarter skewness, while pre-announcement call ratios are driven by stocks with high last-quarter skewness. While prior studies argue that pre-announcement option activity contains private information, our findings indicate that pre-announcement option trading is also motivated by speculation which may adversely affect the level of informed trading in the options market.

Keywords: Informed Trading, Speculation, Options

JEL Classification: G10, G14

Suggested Citation

Alldredge, Dallin M. and Blau, Benjamin M. and Pinegar, J. Michael, Information or Speculation: What Motivates Pre-Earnings Announcement Option Activity? (June 6, 2011). Available at SSRN: https://ssrn.com/abstract=1858881 or http://dx.doi.org/10.2139/ssrn.1858881

Dallin M Alldredge

Washington State University ( email )

Wilson Rd.
College of Business
Pullman, WA 99164
United States

Benjamin M. Blau (Contact Author)

Utah State University - Huntsman School of Business ( email )

3500 Old Main Hill
Logan, UT 84322
United States

J. Michael Pinegar

Brigham Young University - Marriott School of Management ( email )

Provo, UT 84602
United States
801-422-3088 (Phone)
801-422-0108 (Fax)

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