Option Trading Activity, News Releases, and Stock Return Predictability

David Weinbaum (), Andrew Fodor (), Dmitriy Muravyev () and Martijn Cremers ()
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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

Management Science, 2023, vol. 69, issue 8, 4810-4827

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.

Keywords: option trading; news releases; stock return predictability (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (2)

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