Informed options trading before FDA drug advisory meetings

Months before the Food and Drug Administration (FDA) decides to approve or reject a new drug, it often asks committees of drug experts for their recommendations. The experts receive nonpublic technical reports from drug firms and FDA staff. We find significant abnormal options trading before the final reports are created and the committees meet, particularly for small drug firms. These options trades appear to be informed because there are more calls (puts) purchased before approvals (rejections), and a majority have maturities covering the dates when the reports are publicly released. Our results imply that securities regulators should consider monitoring trades early, well before FDA drug approval decisions.

Automated summary

There is significant abnormal options trading before FDA drug approvals, particularly for small drug firms. These trades seem to be informed, as there are more calls (puts) purchased before approvals (rejections), and a majority have maturities covering the dates when the reports are publicly released. Therefore, securities regulators should consider monitoring these trades early.