Abstract: We examine patterns of option trading activity around news announcements. Using a database of option volume initiated by traders to open new positions, combined with a database of news releases, we find that option trading activity is unusually high both immediately before news days and on news days. The trading advantage of option traders stems from their ability to analyze publicly available information as well as anticipate upcoming news events. Ahead of news releases, in-formed option traders trade in the direction of the subsequent news release. After news events they establish significant new positions. Option volume on both days is a stronger predictor of future stock returns than option volume on other days. Purchases of options predict returns on news days and ahead of unanticipated events, but not before anticipated events, and sales of options are in-formative only ahead of anticipated news releases, consistent with the fact that implied volatility increases prior to anticipated news releases and then declines.