Option Trading and Earnings News Dissemination

Posted: 10 Sep 1999

See all articles by Charles M.C. Lee

Charles M.C. Lee

Stanford University - Graduate School of Business

Kaushik I. Amin

Lehman Brothers

Date Written: July 1994

Abstract

Option market activity increases by more than 10% in the four days before quarterly earnings announcements. We show that the direction of this preannouncement trading foreshadows subsequent earnings news. Specifically, we find option traders initiate a greater proportion of long (short) positions immediately before good (bad) earnings news. Mid-quote returns to active-side option trades are positive during non-announcement periods, and are significantly higher immediately prior to earnings announcements. We conclude that option trading facilitates price discovery (the incorporation of information in price) for the underlying security, particularly during the dissemination of earnings news.

JEL Classification: G10, G14

Suggested Citation

Lee, Charles M.C. and Amin, Kaushik I., Option Trading and Earnings News Dissemination (July 1994 ). Available at SSRN: https://ssrn.com/abstract=5442

Charles M.C. Lee (Contact Author)

Stanford University - Graduate School of Business ( email )

Stanford Graduate School of Business
655 Knight Way
Stanford, CA 94305-5015
United States
650-721-1295 (Phone)

Kaushik I. Amin

Lehman Brothers ( email )

9th Floor
New York, NY 10013
United States
212-526-8883 (Phone)
212-212 528-6187 (Fax)

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