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Informed options strategies before corporate events

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  • Augustin, Patrick
  • Brenner, Menachem
  • Grass, Gunnar
  • Orłowski, Piotr
  • Subrahmanyam, Marti G.

Abstract

We analyze how informed investors trade in the options market ahead of corporate news when they receive private, but noisy, information about the timing and impact of these announcements on stock prices. We propose a framework that ranks options trading strategies (option type, maturity, and strike price) based on their maximum attainable leverage when price-taking investors face market frictions. We exploit the heterogeneity in announcement characteristics across twelve categories of corporate events to support that event-specific information signals are informative for announcement returns and that they impact the optimal choice of option moneyness and tenor.

Suggested Citation

  • Augustin, Patrick & Brenner, Menachem & Grass, Gunnar & Orłowski, Piotr & Subrahmanyam, Marti G., 2023. "Informed options strategies before corporate events," Journal of Financial Markets, Elsevier, vol. 63(C).
    • Handle: RePEc:eee:finmar:v:63:y:2023:i:c:s1386418122000568
    DOI: 10.1016/j.finmar.2022.100766
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    References listed on IDEAS

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    More about this item

    Keywords

    Corporate announcements; Derivatives; Event studies; Insider trading; Market microstructure;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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