Option Trading Activity, News Releases, and Stock Return Predictability

We examine which categories of option trading volume carry information about future stock prices around corporate news announcements. We predict and find that purchases of options are informative on news days and ahead of unscheduled events but not before scheduled events, and sales of options predict returns only ahead of scheduled news releases. Therefore, although the arrival of new information is an important reason why option volume predicts stock returns, this relation depends on whether the information is scheduled or unscheduled because only the former affects volatility and thus option prices. We also study how trading costs and margin costs affect ex post profitability around news.

Automated summary

The study reveals that the predictiveness of option trading volume on stock prices depends on whether the information is scheduled or unscheduled. Trading costs and margin costs also have an impact on profitability post news announcements.