M. Cremers, A.Fodor, D. Weinbaum: Where Do Informed Traders Trade (First)? Option Trading Activity, News Releases, and Stock Return Predictability

October 1, 2015

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.