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Informed options trading prior to insider trades
Author(s) -
Hao Grace Qing,
Li Keming
Publication year - 2021
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/fire.12259
Subject(s) - insider trading , insider , business , volatility (finance) , information asymmetry , commission , stock (firearms) , monetary economics , financial economics , alternative trading system , algorithmic trading , economics , finance , law , political science , mechanical engineering , engineering
We find abnormal volatility spreads in the options market immediately before corporate insider stock trades, suggesting informed options trading prior to insider trades. The informed options trading is more pronounced for large insider trades, firms in more corrupt areas, and insider purchases in firms with high information asymmetry. Furthermore, the abnormal volatility spreads are positively associated with the post‐trade abnormal returns. In the aftermath of the Securities and Exchange Commission's squawk box cases, informed options trading before insider trades mostly disappeared except for a group of insider stock sales related to insider derivatives transactions such as employee stock options exercises.