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

Ihsan Badshah and Hardjo Koerniadi
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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

JRFM, 2022, vol. 15, issue 2, 1-9

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.

Keywords: earnings; announcements; options; informed trading; net buying pressure; volatility; direction; at-the-money; out-of-the-money; deep-out-of-the-money (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2022
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