Informed Trading in Options Markets Surrounding Data Breaches

48 Pages Posted: 11 Nov 2019 Last revised: 1 Dec 2020

See all articles by Louis R. Piccotti

Louis R. Piccotti

Oklahoma State University - Stillwater - Spears School of Business

Heng Emily Wang

Oklahoma State University, Spears School of Business

Date Written: November 30, 2020

Abstract

We explore whether there is informed trading, which takes advantage of data breach events. By analyzing transactions in the options market, we conjecture that there are two distinct informed trading patterns that likely 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 signi cantly negative CARs of -0.35% within one day. Cross-sectional analysis provides evidence that put-call ratios have predictive power for stock returns. We provide additional evidences such as the CARs of events with high data-breach probabilities and possible trading strategies in stock markets and options markets.

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

JEL Classification: G13, G14, K24

Suggested Citation

Piccotti, Louis R. and Wang, Heng, Informed Trading in Options Markets Surrounding Data Breaches (November 30, 2020). Available at SSRN: https://ssrn.com/abstract=3478263 or http://dx.doi.org/10.2139/ssrn.3478263

Louis R. Piccotti (Contact Author)

Oklahoma State University - Stillwater - Spears School of Business ( email )

460 Business
Stillwater, OK 74078-0555
United States

Heng Wang

Oklahoma State University, Spears School of Business ( email )

Stillwater, OK
United States

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