Informational Content of Options Trading on Acquirer Announcement Return

Abstract

This study examines the informational content of options trading on acquirer announcement returns. We show that implied volatility spread predicts positively on the cumulative abnormal return (CAR), and implied volatility skew predicts negatively on the CAR. The predictability is much stronger around actual merger and acquisition (M&A) announcement days, compared with pseudo-event days. The prediction is weaker if pre-M&A stock price has incorporated part of the information, but stronger if acquirer's options trading is more liquid. Finally, we find that higher relative trading volume of options to stock predicts higher absolute CARs. The relation also exists among the target firms.

Informed Trading around Stock Split Announcements: Evidence from the Option Market

“…We add to this here by documenting that our option measures do not predict the announcement returns. Chan et al (2015) contend that even though the average announcement returns of acquirers are close to 0, there is large variation in these returns across acquirers. They find that the spread and skew do predict the announcement returns of acquiring firms.…”

“…Given these findings that daily implied volatility changes predict stock volatility levels a few days later, a pertinent question to ask is whether this predictability exists outside the announcement window. To address this issue, we run simulations comparable to those in Chan et al (2015) to assess the degree of predictability in a nonevent period. First, we randomly choose a pseudo-event date for each splitting firm in the period [−100, −20], where day 0 is the split announcement date.…”

“…, Lung and Xu (2014), and Lin and Lu (2015) consider analyst recommendations and Chan, Ge, and Lin (2015) examine mergers and acquisitions.…”

Executive compensation and informed trading in acquiring firms around merger announcements

“…Our analysis is also related to prior studies such as Chan et al (2014) and Cao et al (2005). However, in contrast, we deepen understanding of the economic drivers behind one part of the informed trading.…”

Informed Options Trading Prior to Dividend Change Announcements

“…Findings of these studies suggest that option traders have an information advantage relative to equity traders before informational events. Informed options trading, measured by, for example, implied volatility spread and volatility skew, has been shown to have predictive power for abnormal return around informational events (Chan et al, 2015;Hao, 2016;Jin et al, 2012).On the other hand, other studies indicate that options trading does not contain private information that predicts future stock prices. Chan, Chung, and Fong (2002) find that after controlling for stock trading volume, options trading volume has no incremental predictive power for underlying stock returns.…”