What information do informed traders use?

44 Pages Posted: 21 Jul 2022 Last revised: 14 Aug 2023

See all articles by Oleg Bondarenko

Oleg Bondarenko

University of Illinois at Chicago - Department of Finance

Dmitriy Muravyev

Michigan State University - Department of Finance; Canadian Derivatives Institute

Date Written: June 30, 2022


Informed trading plays a crucial role in financial markets. However, the question remains: how do informed traders gain their edge? We study option traders – an important class of informed traders – and find that their trades used to strongly predict future stock returns. However, the put-call ratio and other measures that aggregate the information content of options trades suddenly and permanently ceased to predict stock returns after October 2009. This timing coincides with the arrest of Raj Rajaratnam and the launch of an unprecedented campaign against insider trading. We hypothesize that insider trading in the options market drove the return predictability, which stopped after Rajaratnam’s arrest. Our empirical tests support this hypothesis and rule out alternative explanations, indicating that insider trading was more common than previously thought.

Keywords: Informed trading, equity options, return predictability, insider trading

JEL Classification: G10, G14

Suggested Citation

Bondarenko, Oleg and Muravyev, Dmitriy, What information do informed traders use? (June 30, 2022). Available at SSRN: https://ssrn.com/abstract=4150768 or http://dx.doi.org/10.2139/ssrn.4150768

Oleg Bondarenko

University of Illinois at Chicago - Department of Finance ( email )

2431 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
United States
(312) 996-2362 (Phone)
(312) 413-7948 (Fax)

Dmitriy Muravyev (Contact Author)

Michigan State University - Department of Finance ( email )

315 Eppley Center
East Lansing, MI 48824-1122
United States

Canadian Derivatives Institute ( email )

3000, chemin de la Côte-Sainte-Catherine
Montréal, Québec H3T 2A7

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