Option Trading Activity, News Releases, and Stock Return Predictability

45 Pages Posted: 2 Jan 2015 Last revised: 12 Jul 2021

See all articles by David Weinbaum

David Weinbaum

Syracuse University

Andy Fodor

Ohio University

Dmitriy Muravyev

Michigan State University - Department of Finance

Martijn Cremers

University of Notre Dame; ECGI

Date Written: July 12, 2021

Abstract

We examine which categories of option trading volume carry information about future stock prices around corporate news announcements. We predict and find that purchases of options are informative on news days and ahead of unscheduled events, but not before scheduled events; and sales of options predict returns only ahead of scheduled news releases. Therefore, while the arrival of new information is an important reason why option volume predicts stock returns, this relation depends on whether the information is scheduled or unscheduled because only the former affects volatility and thus option prices. We also study how trading costs and margin costs affect ex post profitability around news.

Keywords: Option Trading, News Releases, Informed Traders

JEL Classification: G12, G14

Suggested Citation

Weinbaum, David and Fodor, Andy and Muravyev, Dmitriy and Cremers, K. J. Martijn, Option Trading Activity, News Releases, and Stock Return Predictability (July 12, 2021). 11th Annual Mid-Atlantic Research Conference in Finance (MARC), 28th Annual Conference on Financial Economics and Accounting, Available at SSRN: https://ssrn.com/abstract=2544344 or http://dx.doi.org/10.2139/ssrn.2544344

David Weinbaum

Syracuse University ( email )

Syracuse, NY
United States

Andy Fodor (Contact Author)

Ohio University ( email )

514 Copeland Hall
Athens, OH 45701
United States
740.593.0259 (Phone)

Dmitriy Muravyev

Michigan State University - Department of Finance ( email )

315 Eppley Center
East Lansing, MI 48824-1122
United States

K. J. Martijn Cremers

University of Notre Dame ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States

ECGI ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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