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Option trading: Information or differences of opinion?

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  • Choy, Siu Kai
  • Wei, Jason
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    Abstract

    This paper investigates the motive of option trading. We show that option trading is mostly driven by differences of opinion, a finding different from the current literature that attempts to attribute option trading to information asymmetry. Our conclusion is based on three pieces of empirical evidence. First, option trading around earnings announcements is speculative in nature and mostly dominated by small, retail investors. Second, around earnings announcements, the pre-announcement abnormal turnovers of options seem to predict the post-announcement abnormal stock returns. However, once we control for the pre-announcement stock returns, the predictability completely disappears, implying that option traders simply take cues from the stock market and turn around to speculate in the options market. Third, cross-section and time-series regressions reveal that option trading is also significantly explained by differences of opinion. While informed trading is present in stocks, it is not detected in options.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 36 (2012)
    Issue (Month): 8 ()
    Pages: 2299-2322

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    Handle: RePEc:eee:jbfina:v:36:y:2012:i:8:p:2299-2322

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    Web page: http://www.elsevier.com/locate/jbf

    Related research

    Keywords: Option trading; Differences of opinion; Informed trading; Speculation; Earnings announcements;

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    Cited by:
    1. Ovidiu TURCOANE, 2012. "Option Price Estimations and Speculative Trading In Knowledge Society," Informatica Economica, Academy of Economic Studies - Bucharest, Romania, vol. 16(4), pages 131-141.

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