The Role of the Options Market in the Dissemination of Private Information

Abstract

This paper examines the role the options market plays in the dissemination of private information. We find abnormal volume in the options market for three days prior to management forecasts, controlling for concurrent equity volume. Classifying trades as long or short, we find more informed options volume relative to equity volume (1) with relatively greater options market liquidity; (2) when equity is listed on the NYSE or AMEX; (3) for larger surprises; (4) with fewer analysts; (5) for shorter times between the forecast and period end; (6) for good news forecasts; and (7) for smaller percentage institutional holdings. Copyright Blackwell Publishing Ltd, 2004.

The Use of Derivatives by Investment Managers and Implications for Portfolio Performance and Risk*

“…Event study of option trades The literature approaches the use of options for informed trading at a market level by comparing aggregate variables such as prices and volumes between stock and option markets. Cairney and Swisher (2004) represent one of few studies which analyze informed trading in options markets on a lowerfrequency basis, showing abnormal volume in Chicago Board Options Exchange (CBOE) options for three days before earnings announcements. Easley et al (1998) show that price changes in stock markets lead option volumes with a lag of 20-30 min, whereas option volumes affect stock price changes more rapidly.…”

“…Jarnecic (1999) shows that stock volumes on the ASX lead option volumes on the ASX options market. Cairney and Swisher (2004) represent one of few studies which analyze informed trading in options markets on a lowerfrequency basis, showing abnormal volume in Chicago Board Options Exchange (CBOE) options for three days before earnings announcements. Importantly, prior studies have found evidence that mutual funds possess private information (Daniel et al 1997;Wermers 2000).…”

Adaptive order flow forecasting with multiplicative error models

“…On the contrary, Chan and Fong (2000) and Chordia et al (2002) find that trade size is more significant in explaining the volume-volatility relation, particularly when it is employed to measure the aggregate order flow between buyer-and seller-initiated trades. Moreover, Chordia et al (2001) and Cairney and Swisher (2004)'s papers highlight the importance of order flow as a measure of trading activity. Their results demonstrate that order flow is more valuable than volume in inferring the direction of price moves for the next trading day.…”

Informed options trading prior to FDA announcements

“…Several studies find that options volume and order imbalance can predict future stock returns (e.g., Ge et al., 2016; Johnson & So, 2012; Pan & Poteshman, 2006). Numerous studies report evidence of abnormal options trading activity and implied volatility prior to a variety of major corporate news announcements (e.g., Cairney & Swisher, 2004; Chan et al., 2015; Govindaraj et al., 2020). In addition, a meaningful fraction of price discovery is found to occur in equity and futures options markets (e.g., Bohmann et al., 2019; Patel et al., 2020).…”