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
Date Written: February 6, 2019
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