Insider Trading When an Underlying Option is Present

Posted: 30 Sep 2003

See all articles by David C. Hyland

David C. Hyland

Xavier University

Salil K. Sarkar

University of Texas at Arlington

Abstract

We argue that increased leverage, lower litigation risk, and reduced trading costs in the options market result in lower incentives for informed market participants to trade in stocks that have options listed than in stocks without traded options. We also hypothesize that the underlying market for optioned stocks is informationally more efficient than that for nonoptioned stocks. Our cross-sectional tests of U.S. market data show that the level of insider trading is significantly lower, as a percentage of total trading volume, for optioned stocks than for nonoptioned stocks during months when insider trading is intense. When we compare the magnitude of stock-price adjustments to insider trades, our results indicate that the price reaction to insider-trading events is less pronounced for optioned stocks. Both pieces of evidence are consistent with the view that informed trading is less likely to occur and its price effect is better anticipated in the underlying market for optioned stocks than for nonoptioned stocks.

Keywords: Portfolio Management, equity strategies, Portfolio Management, trading and execution

Suggested Citation

Hyland, David C. and Sarkar, Salil K., Insider Trading When an Underlying Option is Present. Available at SSRN: https://ssrn.com/abstract=415542

David C. Hyland (Contact Author)

Xavier University ( email )

Cincinnati, OH 45207

Salil K. Sarkar

University of Texas at Arlington ( email )

415 S West St Apt no 205
Arlington, TX 76013
United States

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