Informed Options Strategies before Corporate Events
Published in Journal of Financial Markets, 2022
To cite: Augustin, Patrick and Menachem Brenner and Gunnar Grass and Piotr Orłowski and Marti G. Subrahmanyam, (2022) Informed Options Strategies before Corporate Events, forthcoming in Journal of Financial Markets
We analyze how informed investors trade in the options market ahead of corporate news when they receive private, but noisy, information about (i) the timing, and (ii) the impact of these announcements on stock prices. We propose a framework that ranks options trading strategies (option type, maturity, and strike price) based on their maximum attainable leverage when price-taking investors face market frictions. We exploit the heterogeneity in announcement characteristics across twelve categories of corporate events to support that event-specific information signals are informative for announcement returns and that they impact the optimal choice of option moneyness and tenor.