How Common is Insider Trading? Evidence from the Options Market

36 Pages Posted: 21 Jul 2022 Last revised: 26 Jul 2022

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

Abstract

Option traders are considered among the most informed investors because their trades strongly predict future stock returns. We identify the source of their information edge using a quasi-exogenous shock to insider trading enforcement. With the arrest of Raj Rajaratnam, prosecutors launched an unprecedented campaign against insider trading making such trading much riskier. Before the arrest, the put-call ratio that aggregates information content of option trades earned a 0.24% weekly alpha among S&P 500 stocks. But this striking predictability suddenly disappeared shortly after Raj’s arrest, as option investors refrained from trading on insider information. These results suggest that insider trading used to be prevalent in the options market and explain why option trades used to predict stock returns.

Keywords: Insider trading, informed trading, equity options, return predictability

JEL Classification: G10, G14

Suggested Citation

Bondarenko, Oleg and Muravyev, Dmitriy, How Common is Insider Trading? Evidence from the Options Market (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
Canada

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