Informed Trading in Options Markets Surrounding Data Breaches

Abstract

We explore whether there is informed trading, which takes advantage of data breach events. By analyzing transactions in the options market, we find two distinct informed trading patterns that begin approximately three months and nine months prior to corporate data-breach announcements, which are supported by evidence of higher trading volume and open interest for put options, a higher put-to-call volume ratio, a higher put-to-call open interest ratio, and lower spreads prior to data-breach announcements. We further examine stock reactions following data-breach announcements and find significantly negative CARs of -0.35% within one day. Cross-sectional analysis provides evidence that options trading activity has predictive power for stock returns. The additional evidences include the CARs of events with high data-breach probabilities and long-short trading opportunities.

Keywords: informed trading, cybersecurity, data breach, option market

JEL Classification: G13, G14, K24