Informed Options Trading Prior to M&A Announcements: Insider Trading?

Abstract

We document pervasive informed trading activity in equity options before M&A announcements. About 25% of takeovers have positive abnormal volumes. These volume patterns indicate that informed traders are likely using bullish directional strategies for the target and volatility strategies for the acquirer. We show that this abnormal activity cannot be explained by deal predictability, speculation, news and rumors, trading of corporate insiders, or leakage in the stock market. While the SEC litigates only about 7% of deals in our sample, the characteristics of illegal option trades before M&A announcements they prosecute closely resemble the documented patterns of unusual options activity.

Keywords: Asymmetric Information, Civil Litigations, Insider Trading, Mergers and Acquisitions, Market Microstructure, Equity Options, SEC

JEL Classification: C1, C4, G13, G14, G34, G38, K22, K41