The Relative Option to Stock Volume and Market Response to Earnings Surprises

Abstract

This study examines the effect of option volume relative to stock volume (O/S) on market response to earnings surprises. The market reaction per unit of earnings surprise is lower for firms that have high O/S prior to earnings announcement than for firms with low O/S prior to earnings announcement. The difference is exacerbated for higher levels of preannouncement returns. Results suggest informed trading by option traders stimulates preemption of the information content of earnings releases and makes earnings surprises less of a surprise. Overall, results are consistent with the view that options improve informational efficiency. Results are robust to several controls.

Option trading after the opening bell and intraday stock return predictability

“…Many studies on option volume's contribution to stock price discovery emphasize the role of private informed trading, yet information processing could be another important channel. 36 Prior research detects informed options trading before firm-specific news releases (Augustin et al, 2015;Cao et al, 2005;Chan, Ge, & Lin, 2015;Rai & Tartaroglu, 2015). 37 In particular, several studies examine options trading activity around earnings releases (Amin & Lee, 1997;Hao, Lee, & Piqueira, 2013;Hu, 2014;Johnson & So, 2012;Lung & Xu, 2014;Ni, Pan, & Poteshman, 2008;Roll et al, 2010;Xing, Zhang, & Zhao, 2010).…”