Speculation or Insider Trading: Informed Trading in Options Markets Preceding Tender Offer Announcements

40 Pages Posted: 9 Aug 2000  

Tom Arnold

University of Richmond - E. Claiborne Robins School of Business

Gayle R. Erwin

University of Virginia - McIntire School of Commerce

Lance A. Nail

University of Alabama at Birmingham - Department of Finance, Economics, and Quantitative Methods

Ted Bos

University of Alabama at Birmingham

Date Written: May 2000

Abstract

In our sample of 305 cash tender offers occurring between 1993 and 1998, we find evidence that the options market has become the preferred trading venue for informed traders. Given this result, we analyze individual call option contracts for those tender offer targets with traded options, identifying the one optimal insider contract which maximizes the returns to insiders with perfect knowledge of a pending tender offer. This analysis allows us to test the competing market anticipation and insider trading theories of pre-bid stock price and volume run-ups using the trading patterns of options which should be preferred by insiders and those preferred by speculators. Our individual contract analysis is consistent with both theories as we find trading in both insider-preferred and speculator-preferred contracts drives aggregate call option volume run-ups. However, heavy trading in the optimal insider contract occurs on heavy volume days for all contracts. These results support the notion of Easley, O'Hara, and Srinivas (1998) that a substitution effect exists whereby informed traders prefer to trade in options markets when possible and that insiders will hide their trades within those of speculators.

Keywords: Informed trading, insider trading, options, tender offer

JEL Classification: G10, G14, G34, K22, K42

Suggested Citation

Arnold, Tom and Erwin, Gayle R. and Nail, Lance A. and Bos, Ted, Speculation or Insider Trading: Informed Trading in Options Markets Preceding Tender Offer Announcements (May 2000). Available at SSRN: https://ssrn.com/abstract=234797 or http://dx.doi.org/10.2139/ssrn.234797

Thomas M. Arnold

University of Richmond - E. Claiborne Robins School of Business ( email )

1 Gateway Drive
Richmond, VA 23173
United States
804-287-6399 (Phone)
804-289-8878 (Fax)

Gayle R. Erwin

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States
804-924-7552 (Phone)
804-924-7074 (Fax)

Lance A. Nail (Contact Author)

University of Alabama at Birmingham - Department of Finance, Economics, and Quantitative Methods ( email )

Birmingham, AL 35294
United States
205-934-8501 (Phone)
205.975.4427 (Fax)

Ted Bos

University of Alabama at Birmingham ( email )

School of Business
Birmingham, AL 35294-4460
United States
205-934-8860 (Phone)
205-975-6234 (Fax)

Paper statistics

Downloads
1,464
Rank
9,384
Abstract Views
6,773