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In the 1990s, companies collected billions in premiums from peculiarly structured put options written on their own stock while almost all of these puts expired worthless. Buyers of these options, primarily nancial intermediaries, lost money as a result. Although these losses might seem puzzling, by offering to buy put options from better informed parties, intermediaries receive private information about the issuing company. We find that the magnitude of changes and structural breaks in the stocks' price trends and volumes around the put sales indicate that the intermediaries were indeed acting on this information and potentially made hundreds of billions of dollars.

Why Do Financial Intermediaries Buy Put Options from Companies?