Download This PaperOption 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
45 Pages Posted: 2 Jan 2015 Last revised: 12 Jul 2021
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: Suggested Citation