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

53 Pages Posted: 2 Jan 2015 Last revised: 27 May 2020

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: May 26, 2020

Abstract

We examine how informed traders trade in the option market around news announcements. We show that their profits depend on whether positions are long or short, 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 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. We also find that informed option trading is profitable around news events, accounting for realistic measures of transaction and margin costs.

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, How Do Informed Option Traders Trade? Option Trading Activity, News Releases, and Stock Return Predictability (May 26, 2020). 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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