Informed Options Strategies before Corporate Events
72 Pages Posted: 9 Oct 2016 Last revised: 7 Jul 2022
Date Written: June 5, 2015
We analyze how informed investors trade in the options market ahead of corporate news when they receive private, but noisy, information about the timing and impact of these announcements on stock prices. We propose a framework that ranks options trading strategies (option type, maturity, and strike price) based on their maximum attainable leverage when price-taking investors face market frictions. We exploit the heterogeneity in announcement characteristics across twelve categories of corporate events to support that event-specific information signals are informative for announcement returns and that they impact the optimal choice of option moneyness and tenor.
Keywords: corporate announcements, derivatives, event studies, insider trading, market microstructure
JEL Classification: G12, G13, G14, K42
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