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Informed Trading and Option Prices: Evidence from Activist Trading

Author

Listed:
  • Pierre Collin-Dufresne

    (Ecole Polytechnique Fédérale de Lausanne , Swiss Finance Institute, and National Bureau of Economic Research (NBER))

  • Vyacheslav Fos

    (Boston College)

  • Dmitriy Muravyev

    (Boston College)

Abstract

Using a comprehensive sample of trades from Schedule 13D filings by activist investors, we study how option prices respond to informed trading in the stock market. We show that this class of informed traders chooses to trade stocks and to not trade derivatives in more than 97% of cases, suggesting that most of informed trading by activist shareholders takes place in the stock market. We find that on days when activists accumulate shares, option implied volatility decreases and volatility skew increases. These changes are consistent with the drop in realized volatility we observe around the filing date. We also find that measures of adverse selection increase for options but decrease for stocks on days when Schedule 13D filers trade in stocks. Option markets seem to reflect valuable volatility specific information.

Suggested Citation

  • Pierre Collin-Dufresne & Vyacheslav Fos & Dmitriy Muravyev, 2015. "Informed Trading and Option Prices: Evidence from Activist Trading," Swiss Finance Institute Research Paper Series 15-55, Swiss Finance Institute, revised Nov 2015.
    • Handle: RePEc:chf:rpseri:rp1555
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    File URL: http://ssrn.com/abstract=2675866
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    Cited by:

    1. Umut c{C}etin, 2016. "Financial equilibrium with asymmetric information and random horizon," Papers 1603.08828, arXiv.org, revised Sep 2017.
    2. Augustin, Patrick & Brenner, Menachem & Grass, Gunnar & Subrahmanyam, Marti G., 2016. "How do insiders trade?," CFS Working Paper Series 541, Center for Financial Studies (CFS).
    3. Augustin, Patrick & Brenner, Menachem & Grass, Gunnar & Orłowski, Piotr & Subrahmanyam, Marti G., 2022. "Informed options strategies before corporate events," LawFin Working Paper Series 39, Goethe University, Center for Advanced Studies on the Foundations of Law and Finance (LawFin).
    4. Umut Çetin, 2018. "Financial equilibrium with asymmetric information and random horizon," Finance and Stochastics, Springer, vol. 22(1), pages 97-126, January.
    5. Emiliano Pagnotta, 2016. "Chasing Private Information," 2016 Meeting Papers 1673, Society for Economic Dynamics.
    6. Çetin, Umut, 2018. "Financial equilibrium with asymmetric information and random horizon," LSE Research Online Documents on Economics 84495, London School of Economics and Political Science, LSE Library.

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