Informed Options Trading Prior to Insider Trades

The Financial Review, Forthcoming

40 Pages Posted: 11 May 2021

See all articles by Grace Qing Hao

Grace Qing Hao

affiliation not provided to SSRN; Department of Finance and Real Estate, The University of Texas at Arlington

Keming Li

Texas A&M University (TAMU) - San Antonio

Date Written: September 29, 2020

Abstract

We find abnormal volatility spreads in the options market immediately before corporate insider stock trades, suggesting informed options trading prior to insider trades. The informed options trading is more pronounced for large insider trades, firms in more corrupt areas, and insider purchases in firms with high information asymmetry. Furthermore, the abnormal volatility spreads are positively associated with the post-trade abnormal returns. In the aftermath of the Securities and Exchange Commission’s squawk box cases, informed options trading before insider trades mostly disappeared except for a group of insider stock sales related to insider derivatives transactions such as employee stock options exercises.

Keywords: information leakage, options market, order exposure risk, insider trades, volatility spread

JEL Classification: G10, G14

Suggested Citation

Hao, Grace Qing and Hao, Grace Qing and Li, Keming, Informed Options Trading Prior to Insider Trades (September 29, 2020). The Financial Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3843362

Grace Qing Hao (Contact Author)

affiliation not provided to SSRN

Department of Finance and Real Estate, The University of Texas at Arlington ( email )

701 S. West Street
Arlington, TX 76019
United States

Keming Li

Texas A&M University (TAMU) - San Antonio ( email )

One University Way
San Antonio, TX 78224
United States

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