The Option to Stock Volume Ratio: Information Releases and the Variance Risk Premium

• In Event: Financial Accounting & Reporting

Abstract

We test whether investor disagreements and private information impact the pricing of options before earnings announcements (EAs). We find higher EA variance risk premiums (VRPs) for firms with a greater option-to-stock trading ratio, our proxy for investor disagreement and private information. This relationship holds conditional to other factors suggested to predict VRPs and appears specific to the EA period. The association holds after accounting for firm-level unobserved heterogeneity and is stronger for smaller firms. Our results suggest the information asymmetries and disagreements that drive excess options trading generate profits to investors willing to sell variance protection around EAs.

Authors

• Thaddeus A. Neururer, University of Akron

• George Papadakis, United States Securities and Exchange Commission