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Option Trading Activity, News Releases, and Stock Return Predictability

Author

Listed:
  • David Weinbaum

    (Whitman School of Management, Syracuse University, Syracuse, New York 13244)

  • Andrew Fodor

    (College of Business, Ohio University, Athens, Ohio 45701)

  • Dmitriy Muravyev

    (Broad College of Business, Michigan State University, East Lansing, Michigan 48824)

  • Martijn Cremers

    (Mendoza College of Business, University of Notre Dame, Notre Dame, Indiana 46556)

Abstract

We examine which categories of option trading volume carry information about future stock prices around corporate news announcements. We predict and find that purchases of options are informative on news days and ahead of unscheduled events but not before scheduled events, and sales of options predict returns only ahead of scheduled news releases. Therefore, although the arrival of new information is an important reason why option volume predicts stock returns, this relation depends on whether the information is scheduled or unscheduled because only the former affects volatility and thus option prices. We also study how trading costs and margin costs affect ex post profitability around news.

Suggested Citation

  • David Weinbaum & Andrew Fodor & Dmitriy Muravyev & Martijn Cremers, 2023. "Option Trading Activity, News Releases, and Stock Return Predictability," Management Science, INFORMS, vol. 69(8), pages 4810-4827, August.
    • Handle: RePEc:inm:ormnsc:v:69:y:2023:i:8:p:4810-4827
    DOI: 10.1287/mnsc.2022.4543
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    References listed on IDEAS

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    2. Yuan, Jianglei & Liu, Dehong & Chen, Carl R. & Hu, Sen, 2024. "Option trading volume and the cross-section of option returns," The North American Journal of Economics and Finance, Elsevier, vol. 74(C).

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