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What options to trade and when: Evidence from seasoned equity offerings

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  • Kim, Donghan
  • Kim, Jun Sik
  • Seo, Sung Won

Abstract

We investigate options predictability and trading patterns around seasoned equity offerings (SEOs). A negative relation is found between option-implied skewness and post-SEO performance, which is more significant for highly overvalued SEOs. In terms of investment timing, the option-implied skewness reflects long-run information before the equity issuances, while short-run information is updated as the issuance nears. For investment horizon measured by time to expiration (TTE), options with long TTEs have only long-run predictability, while options with short TTEs have only short-run predictability. This study supports informed options trading and helps to clarify options informativeness for various estimation periods and TTEs.

Suggested Citation

  • Kim, Donghan & Kim, Jun Sik & Seo, Sung Won, 2018. "What options to trade and when: Evidence from seasoned equity offerings," Journal of Financial Markets, Elsevier, vol. 37(C), pages 70-96.
    • Handle: RePEc:eee:finmar:v:37:y:2018:i:c:p:70-96
    DOI: 10.1016/j.finmar.2016.09.006
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    More about this item

    Keywords

    Seasoned equity offerings; Option-implied skewness; Informed trading; Investment timing; Investment horizon; LEAPS;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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