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

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

See all articles by Martijn Cremers

Martijn Cremers

University of Notre Dame

Andy Fodor

Ohio University

Dmitriy Muravyev

Boston College - 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

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

K. J. Martijn Cremers

University of Notre Dame ( email )

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

Andy Fodor (Contact Author)

Ohio University ( email )

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

Dmitriy Muravyev

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States
2177213772 (Phone)

HOME PAGE: http://www2.bc.edu/dmitriy-muravyev/

David Weinbaum

Syracuse University ( email )

Syracuse, NY
United States

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