Informed Options Trading Prior to Takeover Rumors
Khadivar, H., Davis, F., & Walker, T. (2022). Options trading prior to takeover rumors. International Journal of Managerial Finance.
43 Pages Posted: 25 Nov 2020 Last revised: 28 Nov 2022
Date Written: July 25, 2020
We examine derivatives trading prior to takeover rumors in a sample of 1,638 publicly traded U.S. firms. The volume of options traded is abnormally high over the 5-day pre-rumor period, primarily due to the number of out-of-the-money call options traded. In addition, the direction of option trades (abnormal call volume minus abnormal put volume) prior to takeover rumors predicts forthcoming takeover announcements and rumor date returns. Identifying suspicious trades, we find evidence of individuals trading on knowledge of takeover rumor candidacy in the options market. Our results further indicate that informed traders prefer the options market to the equity market.
Keywords: Options trading, Takeover rumors, Rumored targets, Takeover announcements, Mergers and acquisitions
JEL Classification: G14, G18, G34, K22
Suggested Citation: Suggested Citation