Net Buying Pressure and Informed Trading in the Options Market: Evidence From Earnings Announcements

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Vietnam Symposium in Banking and Finance (VSBF)

Informed investors use options market to exploit their private information advantage to trade on the direction and volatility of underlying asset values. This paper tests whether informed trading occurs around quarterly earnings announcement events in the options market.We capture informed trading by using the net buying pressure measure of Bollen and Whaley (2004). Empirical tests show that informed trading tends to occur in at-the-money (ATM) options as this option is cheaper and more liquid relative to other categories of moneyness (leverage). Net buying pressure measure of ATM options prior to good earnings news is significantly related to announcement abnormal returns. Also, net buying pressures in the post event window is associated with the direction of post-event stock abnormal returns. We conclude from this evidence that option investors have superior skills in processing publicly disclosed information relative to other investors.

Earnings announcements , Equity options , Informed trading , Option net buying pressure
The 2nd Vietnam Symposium in Banking and Finance (VSBF), 26-28 October 2017, Ho Chi Minh City, Vietnam.
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