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Informed Options Trading Prior to Dividend Change Announcements

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  • Jun Zhang

Abstract

This paper investigates the information content of options trading prior to dividend change announcements. I find a positive (negative) relation between pre†announcement abnormal implied volatility (IV) spread (abnormal IV skew) and cumulative abnormal stock returns around dividend change announcements. The predictive power of informed options trading is stronger for announcements of dividend reduction and when the options market is more liquid relative to the stock market and weaker when information has already been incorporated in the stock market. The predictability of informed options trading is robust to a placebo test and alternative measures of informed options trading. Overall results suggest that informed options trading predicts dividend change announcement returns.

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  • Jun Zhang, 2018. "Informed Options Trading Prior to Dividend Change Announcements," Financial Management, Financial Management Association International, vol. 47(1), pages 81-103, March.
    • Handle: RePEc:bla:finmgt:v:47:y:2018:i:1:p:81-103
    DOI: 10.1111/fima.12187
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    3. Kelley Bergsma & Andy Fodor & Vijay Singal & Jitendra Tayal, 2020. "Option trading after the opening bell and intraday stock return predictability," Financial Management, Financial Management Association International, vol. 49(3), pages 769-804, September.
    4. Liang‐Chih Liu & Tian‐Shyr Dai & Lei Zhou & Hao‐Han Chang, 2022. "Analyzing interactive call, default, and conversion policies for corporate bonds," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(8), pages 1597-1638, August.
    5. Mu-En Wu & Jia-Hao Syu & Chien-Ming Chen, 2022. "Kelly-Based Options Trading Strategies on Settlement Date via Supervised Learning Algorithms," Computational Economics, Springer;Society for Computational Economics, vol. 59(4), pages 1627-1644, April.
    6. Asem, Ebenezer, 2022. "Are dividend changes exploited in the equity market?," The Quarterly Review of Economics and Finance, Elsevier, vol. 85(C), pages 125-133.
    7. Ming‐Yu Liu, 2019. "Improving momentum strategies using residual returns and option‐implied information," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(4), pages 499-521, April.

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