Informed options trading prior to FDA announcements

Marc J. M. Bohmann and Vinay Patel ()

Journal of Business Finance & Accounting, 2022, vol. 49, issue 7-8, 1211-1236

Abstract: We find that pre‐announcement implied volatility spreads and options trading activity are abnormally elevated and can predict Food and Drug Administration (FDA) announcement date stock returns. The effect is more pronounced in firms with higher levels of information asymmetry and lower‐quality corporate governance suggesting that some options traders are informed in advance of the details that affect the stock price impact of the FDA news. We provide the first examination of informed options trading prior to FDA announcements during a 21‐year period. Our findings have implications for regulators, investors and relevant firms.

Date: 2022
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https://doi.org/10.1111/jbfa.12600

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