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)
Abstract
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.Description
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The 2nd Vietnam Symposium in Banking and Finance (VSBF), 26-28 October 2017, Ho Chi Minh City, Vietnam.
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NOTICE: this is the author’s version of a work that was accepted for publication. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in (see Citation). The original publication is available at (see Publisher's Version).