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

See all articles by Hamed Khadivar

Hamed Khadivar

Department of Finance, Université du Québec à Montréal

Frederick James Davis

Concordia University

Thomas John Walker

Concordia University, Quebec - Department of Finance

Date Written: July 25, 2020

Abstract

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

Khadivar, Hamed and Davis, Frederick James and Walker, Thomas John, Informed Options Trading Prior to Takeover Rumors (July 25, 2020). Khadivar, H., Davis, F., & Walker, T. (2022). Options trading prior to takeover rumors. International Journal of Managerial Finance., Available at SSRN: https://ssrn.com/abstract=3707256 or http://dx.doi.org/10.2139/ssrn.3707256

Hamed Khadivar (Contact Author)

Department of Finance, Université du Québec à Montréal ( email )

Case postale 8888
Succursale Centre-ville
Montreal, Quebec H3C 3P8
Canada
5147549199 (Phone)

Frederick James Davis

Concordia University ( email )

Montreal, Quebec
Canada

Thomas John Walker

Concordia University, Quebec - Department of Finance ( email )

Montreal, Quebec H3G 1M8
Canada

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