How Do Informed Option Traders Trade? Option Trading Activity, News Releases, and Stock Return Predictability

Cremers, Martijn; Fodor, Andy; Muravyev, Dmitriy; Weinbaum, David

doi:10.2139/ssrn.2544344

How Do Informed Option Traders Trade? Option Trading Activity, News Releases, and Stock Return Predictability

11th Annual Mid-Atlantic Research Conference in Finance (MARC)

28th Annual Conference on Financial Economics and Accounting

56 Pages Posted: 2 Jan 2015 Last revised: 8 Feb 2019

See all articles by Martijn Cremers

Dmitriy Muravyev

Michigan State University - Department of Finance

David Weinbaum

Syracuse University

Date Written: February 6, 2019

Abstract

We examine how informed traders trade in the option market around news announcements. The optimal strategy depends on whether trades take place before or after news releases and whether events are scheduled or unscheduled. We predict and find that informed option traders use short (rather than long) positions only before scheduled news announcements. Purchases of options thus predict returns on news days and ahead of unscheduled events, but not before scheduled events, and sales of options are informative only ahead of scheduled news releases. Informed option trading is profitable around news events, taking into account realistic measures of transaction costs.

Keywords: Option Trading, News Releases, Informed Traders

JEL Classification: G12, G14

Suggested Citation: Suggested Citation

Cremers, K. J. Martijn and Fodor, Andy and Muravyev, Dmitriy and Weinbaum, David, How Do Informed Option Traders Trade? Option Trading Activity, News Releases, and Stock Return Predictability (February 6, 2019). 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