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Detecting Informed Trading Activities in the Options Markets

Author

Listed:
  • Marc CHESNEY

    (University of Zurich and Swiss Finance Institute)

  • Remo CRAMERI

    (University of Zurich and Swiss Finance Institute (Ph.D Program))

  • Loriano MANCINI

    (Geneva Finance Research Institute and FINRISK)

Abstract

We develop statistical methods to detect informed trading in options markets. We apply these methods to 31 companies from various sectors over 14 years analyzing approximately 9.6 million option prices. We find that option informed trading tends to cluster prior to certain events, takes place more in put than call options, generates easily large gains exceeding millions, is not contemporaneously reflected in the underlying stock price, involves around the money options during calm times and out-of-the-money options during turbulent times. These findings are not driven by false discoveries in informed trades which are controlled using multiple hypothesis testing techniques.

Suggested Citation

  • Marc CHESNEY & Remo CRAMERI & Loriano MANCINI, "undated". "Detecting Informed Trading Activities in the Options Markets," Swiss Finance Institute Research Paper Series 11-42, Swiss Finance Institute.
  • Handle: RePEc:chf:rpseri:rp1142
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    Keywords

    Options Trades; Open Interest; Informed trading; False Discovery Rate;

    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
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C65 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Miscellaneous Mathematical Tools

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