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Trading Activity in Options and Stock Around Price‐Sensitive News Announcements

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  • Khelifa Mazouz
  • Yuliang Wu
  • Shuxing Yin

Abstract

This study investigates the trading activity in options and stock markets around informed events with extreme daily stock price movements. We find that informed agents are more likely to trade options prior to negative news and stocks ahead of positive news. We also show that optioned stocks overreact to the arrival of negative news, but react efficiently to positive news. However, the overreaction patterns are unique to the subsample of stocks with the lowest pre‐event abnormal option/stock volume ratio (O/S). This finding suggests that the incremental benefit of option listing is related to the level of option trading activity, over and beyond the presence of an options market on the firm's stock. Finally, we find that the pre‐event abnormal O/S is a better predictor of stock price patterns following a negative shock than is the pre‐event O/S, implying that the former may contain more information about the future value of stocks than the latter. © 2014 Wiley Periodicals, Inc. Jrl Fut Mark 35:1173–1194, 2015

Suggested Citation

  • Khelifa Mazouz & Yuliang Wu & Shuxing Yin, 2015. "Trading Activity in Options and Stock Around Price‐Sensitive News Announcements," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 35(12), pages 1173-1194, December.
    • Handle: RePEc:wly:jfutmk:v:35:y:2015:i:12:p:1173-1194
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    Cited by:

    1. Lee A. Smales & Zhangxin (Frank) Liu & Cameron D. Robertson, 2022. "One session options: Playing the announcement lottery?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(2), pages 192-211, February.
    2. Thuy Khang Huynh & Vijay Shenai, 2019. "Option Trading Volumes and Their Impact on Stock Prices at Earnings’ Announcements: A Study of S & P100 Stocks in the Post Crisis Era 2010-2017," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 9(3), pages 83-103, July.
    3. Jun Zhang, 2019. "Is options trading informed? Evidence from credit rating change announcements," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(9), pages 1085-1106, September.

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