Insider Trading With Options

Abstract

Trading data from Finland show that rank-and-file employees buy options written on their employers’ stocks. These purchases contain price-relevant information: weekly excess returns on the underlying stocks are over 60 basis points. The informativeness is most pronounced before earnings announcements, extends to firms in the employer's supply chain, is not driven by industry knowledge, and disappears upon job separation. My results show that some rank-and-file employees actively attempt to exploit their information advantage by trading on the option market, raising important questions about firms’ disclosure policies and the alignment of employee incentives with market efficiency. Consistent with prospect theory, this behavior is more prevalent after employees experience large financial losses.

Keywords: Employees, insider trading, options

JEL Classification: G11, G14, M41