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Option volume and evidence of informed trading : an empirical study of daily option trading volume from selected S&P500 companies in the period 2009 to 2014.

Stene, Fredrik Honningsvåg; Thuve, Mattias
Master thesis
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URI
http://hdl.handle.net/11250/2455479
Date
2017
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  • Master Thesis [4657]
Abstract
This thesis seeks to unveil evidence of informed trading in option markets. We

use unsigned option volume data to construct a signed modified put call ratio, which

is used to analyze unusual trading patterns prior to large spikes in abnormal returns

on the underlying equities. The data sample consists of daily option volume of approximately

350 000 options from 232 random companies listed on S&P500 between

the 1st of June 2009 to the 6th of August 2014. We conduct statistical tests across

time, across firms, and across both simultaneously to identify informed trading under

the assumption of a semi efficient market; and investigate any preferences an

informed investor might have with regard to selected firm characteristics and timing.

We discover evidence of unusual trading patterns one day prior to large spikes

in abnormal returns, and find supporting evidence that informed traders prefer

out-of-the-money compared to at-the-money and in-the-money options. However,

we do not find any significant linkage between a company’s market value or priceto-book-value,

or that the amount of informed trading in the option market has

decreased with time.

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