Trading Activity in Options and Stock Around Price‐Sensitive News Announcements

Abstract

This study investigates the trading activity in options and stock markets around informed events with extreme daily stock price movements. We find that informed agents are more likely to trade options prior to negative news and stocks ahead of positive news. We also show that optioned stocks overreact to the arrival of negative news, but react efficiently to positive news. However, the overreaction patterns are unique to the subsample of stocks with the lowest pre‐event abnormal option/stock volume ratio (O/S). This finding suggests that the incremental benefit of option listing is related to the level of option trading activity, over and beyond the presence of an options market on the firm's stock. Finally, we find that the pre‐event abnormal O/S is a better predictor of stock price patterns following a negative shock than is the pre‐event O/S, implying that the former may contain more information about the future value of stocks than the latter. © 2014 Wiley Periodicals, Inc. Jrl Fut Mark 35:1173–1194, 2015

Is options trading informed? Evidence from credit rating change announcements

“…So I expect the announcements of credit rating downgrades to be more informational. In addition, options trading activity is different before positive and negative news, and informed traders are more likely to trade options before negative news (Black, ; Kang & Park, ; Mazouz et al, ). So I expect that options trading before downgrade announcements is more informational.…”

“…Expecting negative market reactions, more informed traders may choose to trade in the options market before announcements with negative market reactions, making options trading more informational. Kang and Park (2014) and Mazouz, Wu, and Yin (2015) find that informed agents are more likely to trade options before negative news and stocks ahead of positive news. Therefore, options trading is expected to be more informational before downgrade than upgrade announcements.…”

Informed trading around earnings announcements—Spot, futures, or options?

“…Past studies have documented the behavior of options volume around events like mergers and acquisitions, insider trading, bankruptcy, etc. (for instance, Mazouz, Wu, & Yin, 2015;Spyrou, Tsekrekos, & Siougle, 2011;Wang, Yan, Zhang, & Gao, 2018). This study focuses on option volumes around quarterly EA only.…”

“…(for instance,Mazouz, Wu, & Yin, 2015;Spyrou, Tsekrekos, & Siougle, 2011;Wang, Yan, Zhang, & Gao, 2018). (for instance,Mazouz, Wu, & Yin, 2015;Spyrou, Tsekrekos, & Siougle, 2011;Wang, Yan, Zhang, & Gao, 2018).…”

Is Indian Equity Options Market Suitable for Hedging When the Options Payoff Structure Changes?

“…But both stock and option quote revisions had a predictive capacity for subsequent quote revisions, and the options trades contain less information than stock trades. Conover and Peterson (1999) and Mazouz, Wu, and Yin (2015) found out that the stock market led the options market in case of positive news. But during the post-regulation period, no lead-lag structure was identified.…”