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

Abstract

Prior research shows that splitting firms earn positive abnormal returns and that they experience an increase in stock return volatility. By examining option-implied volatility, we assess option traders' perceptions on return and volatility changes arising from stock splits. We find that they do expect higher volatility following splits. There is only weak evidence, though, of option traders anticipating an abnormal increase in stock prices. We also show that our option measures can predict both stock volatility levels and changes after the announcement. However, there is little evidence that they can predict the returns of splitting firms.

When do informed traders acquire and trade on informational advantage? Evidence from Federal Reserve stress tests

“…Finally, we contribute to the options literature by providing empirical evidence from a novel new setting that supports the findings of Kim, Kim, and Seo (2018) that informed option traders exploit their informational advantage as soon as possible. Our findings regarding the timing of option traders' information acquisition and trading are consistent with existing studies, such as Jin et al (2012), Gharghori et al (2017), and Weinbaum et al (2020), that find that return predictability from option trading is driven by acquisition of private information as well as a superior ability to process public information.…”

“…Recent empirical studies provide consistent evidence of informed option trading before and after public news releases and considerable support for both the private information and superior processing ability hypotheses (see, e.g., Weinbaum, Fodor, Muravyev, & Cremers, 2020;Gharghori et al, 2017;Hao, 2016;Jin et al, 2012). Our aim in this paper is not necessarily to disprove one theory for the other, but rather, by applying a new data set to this field we aim to better understand the patterns of acquisition, and use, of data for informed trading purposes.…”

Volatility jumps and macroeconomic news announcements

“…S&P500 (SP) options data is mainly sourced from Optionmetrics, spanning January 4, 2000 through April 28, 2017 (4,357 days). Following Gharghori, Maberly, and Nguyen (), the day‐ t IV for SP options is the weighted average of day‐ t implied volatilities on all S&P500 options, where the option vegas are used as weights…”

“…We also employ the usual filters prior to constructing stock option IV (Chan, Ge, & Lin, ; Gharghori et al, ). We focus on short‐term, close‐to‐the money options (time to maturity between 5 and 60 days and moneyness between 0.95 and 1.05).…”

Anchoring-Adjusted Capital Asset Pricing Model

“…Ikenberry et al (2003) uses data from 1990 to 1997 and confirms the earlier findings. Gharghori et al (2015) find that option market traders do expects an increase in return volatility after the split. Kim et al (2008) examine the long-run performance of 1600 firms with reverse stock-splits and reports negative abnormal returns.…”