Why Do Investment Banks Buy Put Options from Companies?

57 Pages Posted: 4 Dec 2012 Last revised: 30 Apr 2015

See all articles by Stanley B. Gyoshev

Stanley B. Gyoshev

XFI Centre for Finance and Investment - University of Exeter Business School

Todd R. Kaplan

University of Exeter Business School - Department of Economics; University of Haifa - Department of Economics

Samuel H. Szewczyk

Drexel University - Department of Finance

George P. Tsetsekos

Drexel University - Department of Finance

Date Written: June 1, 2013

Abstract

Companies collected billions in premiums from peculiarly structured put options written on their own stock, while almost all of these puts expired worthless quarter after quarter. Buyers of these options, primarily investment banks, lost money as a result. Although these losses might seem puzzling, we model how by offering to buy put options from better informed parties, investment banks receive private information about the issuing company. Empirically, we find a 12% increase in the stock prices and a 40% increase in the trading volumes around the put sales, indicating indeed that investment banks, the bankers personally or their clients may have acted on information obtained from these transactions.

Keywords: Screening, Separating Equilibrium, Put Options, Information Acquisition, Strategic Trading

JEL Classification: G12, G14, G24, G28, C7, D82

Suggested Citation

Gyoshev, Stanley B. and Kaplan, Todd R. and Szewczyk, Samuel H. and Tsetsekos, George P., Why Do Investment Banks Buy Put Options from Companies? (June 1, 2013). Available at SSRN: https://ssrn.com/abstract=2185115 or http://dx.doi.org/10.2139/ssrn.2185115

Stanley B. Gyoshev (Contact Author)

XFI Centre for Finance and Investment - University of Exeter Business School ( email )

University of Exeter
Xfi Building, Rennes Dr.
Exeter, EX4 3BZ
United Kingdom
+44-1392-72-3227 (Phone)
+44-1392-262475 (Fax)

HOME PAGE: http://business-school.exeter.ac.uk/about/whoswho/index.php?web_id=Stanley_Gyoshev&tab=profile

Todd R. Kaplan

University of Exeter Business School - Department of Economics ( email )

Streatham Court
Exeter, EX4 4RJ
United Kingdom
+44 13 9226 3237 (Phone)

University of Haifa - Department of Economics

Haifa 31905
Israel

Samuel H. Szewczyk

Drexel University - Department of Finance ( email )

LeBow College of Business
Philadelphia, PA 19104
United States
215-895-1746 (Phone)

George P. Tsetsekos

Drexel University - Department of Finance ( email )

College of Business
Philadelphia, PA 19104
United States
215-895-1741 (Phone)
215-895-2955 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
575
Abstract Views
2,501
Rank
72,637
PlumX Metrics