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Net Buying Pressure and Informed Trading in the Options Market: Evidence from Earnings Announcements

Author

Listed:
  • Ihsan Badshah

    (Department of Finance, Business School, Auckland University of Technology, Private Bag 92006, Auckland 1142, New Zealand)

  • Hardjo Koerniadi

    (Department of Finance, Business School, Auckland University of Technology, Private Bag 92006, Auckland 1142, New Zealand)

Abstract

By employing the modified net buying pressure as a measure of informed option trading, this study tested whether option trading around quarterly earnings announcements is either directionally motivated and/or volatility motivated. We found evidence that is consistent with the idea that option investors have private information prior to positive earnings announcements and use at-the-money options to exploit their informational advantage. In the post-event period, however, informed option investors trade by using deep-out-of-the-money and out-of-the-money options. We documented limited evidence on the volatility-motivated option trading, and our results suggest that this type of option trading could be motivated by hedging purposes only.

Suggested Citation

  • Ihsan Badshah & Hardjo Koerniadi, 2022. "Net Buying Pressure and Informed Trading in the Options Market: Evidence from Earnings Announcements," JRFM, MDPI, vol. 15(2), pages 1-9, January.
    • Handle: RePEc:gam:jjrfmx:v:15:y:2022:i:2:p:53-:d:731941
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