Hostname: page-component-59f8fd8595-gtxf7 Total loading time: 0 Render date: 2023-03-22T22:40:32.907Z Has data issue: true Feature Flags: { "useRatesEcommerce": false } hasContentIssue true

Informed Trading in the Stock Market and Option-Price Discovery

Published online by Cambridge University Press:  04 August 2020

Pierre Collin-Dufresne
Swiss Finance Institute, Ecole Polytechnique Federale de Lausanne
Vyacheslav Fos*
Boston College Carroll School of Management Centre for Economic Policy Research (CEPR) European Corporate Governance Institute (ECGI)
Dmitry Muravyev
Michigan State University Eli Broad College of
* (corresponding author)


When activist shareholders file Schedule 13D filings, the average stock-price volatility drops by approximately 10%. Prior to filing days, volatility information is reflected in option prices. Using a comprehensive sample of trades by Schedule 13D filers that reveals on what days and in what markets they trade, we show that on days when activists accumulate shares, option-implied volatility decreases, implied volatility skew increases, and implied volatility time slope increases. The evidence is consistent with a theoretical model where it is common knowledge that informed trading occurs only in the stock market and market makers update option prices based on stock-price and order-flow dynamics.

Research Article
© The Author(s), 2020. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)


We thank Kerry Back, Tarun Chordia, Benjamin Golez (discussant), Charles Jones, Marcin Kacperczyk (discussant), Patrik Sandas (discussant), Vish Viswanathan (discussant), and Jiang Wang and seminar participants at Boston College, Baruch College, the Said School of Business, St. Gallen University, Penn State University, Case Western Reserve, HEC Montreal, the Montreal Structured Finance and Derivatives Institute (IFSID) 2015 Conference on Financial Derivatives in Montreal, the 2016 Econometric Society Meetings in Geneva, the 2016 Instituto Tecnológico Autónomo de México (ITAM) Finance Conference, the 2016 Cavalcade, the 2016 Swiss Finance Institute (SFI) Research Days, the 2015 Foundation for the Advancement of Research in Financial Economics (FARFE) Conference, the 2016 Chicago Conference on Derivatives and Volatility, and the 2017 American Finance Association (AFA) Conference for their helpful comments and suggestions. We are also grateful to Nicholas Panos from the U.S. Securities and Exchange Commission (SEC) for educating us on the institutional details related to this study. Virginia Jiang, Cong Gu, Yujia Liu, Xin Luo, Victoria Ngo-Lam, Karina Olague, Eunji Oh, Ye Sun, Sofiya Teplitskaya, Tong Tong, Tiantao Zheng, and Pei Zou provided excellent research assistance.


Admati, A., and Pfleiderer, P.. “A Theory of Intraday Patterns: Volume and Price Variability.” Review of Financial Studies, 1 (1988), 340.CrossRefGoogle Scholar
Ahern, K. R.Information Networks: Evidence from Illegal Insider Trading Tips.” Journal of Financial Economics, 125 (2017), 2647.CrossRefGoogle Scholar
Appel, I., and Fos, V.. “Active Short Selling by Hedge Funds.” Working Paper, Center for Economic and Policy Research (2019).Google Scholar
Aragon, G., and Martin, S.. “A Unique View of Hedge Fund Derivatives Usage: Safeguard or Speculation?Journal of Financial Economics, 105 (2012), 436456.CrossRefGoogle Scholar
Augustin, P.; Brenner, M.; and Subrahmanyam, M.. “Informed Options Trading Prior to M&A Announcements: Insider Trading?” Management Science, 65 (2019), 56975720.Google Scholar
Back, K.Asymmetric Information and Options.” Review of Financial Studies, 6 (1993), 435472.CrossRefGoogle Scholar
Back, K., and Baruch, S.. “Information in Securities Markets: Kyle Meets Glosten and Milgrom.” Econometrica, 72 (2004), 433465.CrossRefGoogle Scholar
Back, K.; Collin-Dufresne, P.; Fos, V.; Li, T.; and Ljungqvist, A.. “Activism, Strategic Trading, and Liquidity.” Econometrica, 86 (2018), 14311463.CrossRefGoogle Scholar
Back, K., and Pedersen, H.. “Long-Lived Information and Intraday Patterns.” Journal of Financial Markets, 1 (1998), 385402.CrossRefGoogle Scholar
Bates, D.The Market for Crash Risk.” Journal of Economic Dynamics & Control, 32 (2008), 22912321.CrossRefGoogle Scholar
Biais, B., and Hillion, P.. “Insider and Liquidity Trading in Stock and Options Markets.” Review of Financial Studies, 7 (1994), 743780.CrossRefGoogle Scholar
Black, F.Fact and Fantasy in the Use of Options.” Financial Analysts Journal, 31 (1975), 3641+61–72.CrossRefGoogle Scholar
Bollen, N., and Whaley, R.. “Does Net Buying Pressure Affect the Shape of Implied Volatility Functions?Journal of Finance, 59 (2004), 711753.CrossRefGoogle Scholar
Brav, A.; Jiang, W.; Partnoy, F.; and Thomas, R.. “Hedge Fund Activism, Corporate Governance, and Firm Performance.” Journal of Finance, 63 (2008), 17291775.CrossRefGoogle Scholar
Brav, A., and Mathews, R. D.. “Empty Voting and the Efficiency of Corporate Governance.” Journal of Financial Economics, 99 (2011), 289307.CrossRefGoogle Scholar
Burkart, M., and Lee, S.. “Signalling to Dispersed Shareholders and Corporate Control.” Review of Economic Studies, 82 (2015), 141.CrossRefGoogle Scholar
Caldentey, R., and Stacchetti, E.. “Insider Trading with a Random Deadline.” Econometrica, 78 (2010), 245283.Google Scholar
Cao, C.; Griffin, J.; and Chen, Z.. “Informational Content of Option Volume Prior to Takeovers.” Journal of Business, 78 (2005), 10731109.CrossRefGoogle Scholar
Chakravarty, S.; Gulen, H.; and Mayhew, S.. “Informed Trading in Stock and Option Markets.” Journal of Finance, 59 (2004), 12351258.CrossRefGoogle Scholar
Chan, K.; Chung, P.; and Fong, W.-M.. “The Informational Role of Stock and Option Volume.” Review of Financial Studies, 15 (2002), 10491075.CrossRefGoogle Scholar
Christoffersen, S.; Geczy, C.; Musto, D.; and Reed, A.. “Vote Trading and Information Aggregation.” Journal of Finance, 62 (2007), 28972929.CrossRefGoogle Scholar
Collin-Dufresne, P., and Fos, V.. “Do Prices Reveal the Presence of Informed Trading?Journal of Finance, 70 (2015), 15551582.CrossRefGoogle Scholar
Collin-Dufresne, P., and Fos, V.. “Insider Trading, Stochastic Liquidity, and Equilibrium Prices.” Econometrica, 84 (2016a), 14411475.CrossRefGoogle Scholar
Collin-Dufresne, P., and Fos, V.. “Insider Trading with a Random Horizon.” Working Paper, Boston College (2016b).Google Scholar
Cremers, M., and Weinbaum, D.. “Deviations from Put-Call Parity and Stock Return Predictability.” Journal of Financial and Quantitative Analysis, 45 (2010), 335367.CrossRefGoogle Scholar
Duffie, D.; Pan, J.; and Singleton, K.. “Transform Analysis and Asset Pricing for Affine Jump-Diffusions.” Econometrica, 68 (2000), 13431376.CrossRefGoogle Scholar
Dybvig, P., and Huang, C.-F.. “Nonnegative Wealth, Absence of Arbitrage, and Feasible Consumption Plans.” Review of Financial Studies, 1 (1988), 377401.CrossRefGoogle Scholar
Easley, D.; O’Hara, M.; and Srinivas, P. S.. “Option Volume and Stock Prices: Evidence on Where Informed Traders Trade.” Journal of Finance, 53 (1998), 431465.CrossRefGoogle Scholar
Ge, L.; Tse-Chun, L.; and Pearson, N.. “Why Does the Option to Stock Volume Ratio Predict Stock Returns?Journal of Financial Economics, 120 (2016), 601622.CrossRefGoogle Scholar
Gharghori, P.; Maberly, E. D.; and Nguyen, A.. “Informed Trading Around Stock Split Announcements: Evidence from the Option Market.” Journal of Financial and Quantitative Analysis, 52 (2017), 705735.CrossRefGoogle Scholar
Goncalves-Pinto, L.; Grundy, B. D.; Hameed, A.; van der Heijden, T.; and Zhu, Y.. “Why Do Option Prices Predict Stock Returns? The Role of Price Pressure in the Stock Market.” Management Science, 66 (2020), 39033926.CrossRefGoogle Scholar
Harrison, J. M., and Pliska, S. R.. “Martingales and Stochastic Integrals in the Theory of Continuous Trading.” Stochastic Processes and Their Applications, 11 (1981), 215260.CrossRefGoogle Scholar
Hayunga, D., and Lung, P.. “Trading in the Options Market Around Financial Analysts’ Consensus Revisions.” Journal of Financial and Quantitative Analysis, 49 (2014), 725747.CrossRefGoogle Scholar
Hu, H. T., and Black, B.. “Hedge Funds, Insiders, and the Decoupling of Economic and Voting Ownership: Empty Voting and Hidden (Morphable) Ownership.” Journal of Corporate Finance, 13 (2007), 343367.CrossRefGoogle Scholar
Hu, J.Does Option Trading Convey Stock Price Information?Journal of Financial Economics, 111 (2014), 625645.CrossRefGoogle Scholar
Johnson, T., and So, E.. “The Option to Stock Volume Ratio and Future Returns.” Journal of Financial Economics, 106 (2012), 262286.CrossRefGoogle Scholar
Kacperczyk, M., and Pagnotta, E.. “Chasing Private Information.” Review of Financial Studies, 32 (2017), 49975047.CrossRefGoogle Scholar
Klein, A., and Zur, E.. “Entrepreneurial Shareholder Activism: Hedge Funds and Other Private Investors.” Journal of Finance, 64 (2009), 187229.CrossRefGoogle Scholar
Kyle, A.Continuous Auctions and Insider Trading.” Econometrica, 53 (1985), 13151335.CrossRefGoogle Scholar
Mayhew, S., and Mihov, V.. “How Do Exchanges Select Stocks for Option Listing?Journal of Finance, 59 (2004), 447471.CrossRefGoogle Scholar
Muravyev, D.Order Flow and Expected Option Returns.” Journal of Finance, 71 (2016), 673708.CrossRefGoogle Scholar
Muravyev, D.; Pearson, N. D.; and Broussard, J. P.. “Is There Price Discovery in Equity Options?Journal of Financial Economics, 107 (2013), 259283.CrossRefGoogle Scholar
Ni, S.; Pan, J.; and Poteshman, A.. “Volatility Information Trading in the Option Market.” Journal of Finance, 63 (2008), 10591091.CrossRefGoogle Scholar
Pan, J.The Jump-Risk Premia Implicit in Options: Evidence from an Integrated Time-Series Study.” Journal of Financial Economics, 63 (2002), 350.CrossRefGoogle Scholar
Pan, J., and Poteshman, A.. “The Information in Option Volume for Future Stock Prices.” Review of Financial Studies, 19 (2006), 871908.CrossRefGoogle Scholar
Poon, S.-H., and Granger, C.. “Forecasting Volatility in Financial Markets: A Review.” Journal of Economic Literature, 41 (2003), 478539.CrossRefGoogle Scholar
Rubinstein, M.Implied Binomial Trees.” Journal of Finance, 49 (1994), 771818.CrossRefGoogle Scholar
Vijh, A.Liquidity of the CBOE Equity Options.” Journal of Finance, 45 (1990), 11571179.CrossRefGoogle Scholar
Supplementary material: PDF

Collin-Dufresne et al. supplementary material

Internet Appendix

Download Collin-Dufresne et al. supplementary material(PDF)
PDF 507 KB