Trading in the Options Market Around the Financial Analysts’ Consensus Revision
42 Pages Posted: 18 Jan 2013 Last revised: 18 Jun 2015
Date Written: November 21, 2012
This article investigates the options market around a revision in the financial analysts’ consensus recommendation. The results demonstrate that options investors trade in the correct direction of the upcoming revision approximately three days prior to the announcement. We find this behavior in options-implied prices, implied volatilities, and options trading volume. Tests confirm that the options market leads the stock market before the financial analysts’ revision. Moreover, using all firms with outstanding options, an out-of-sample analysis produces a profitable zero-cost trading strategy net of transaction costs based on the relative valuations between the synthetic and the underlying equity security.
Keywords: Options, Financial analysts, Price discovery, Informed trading, Neglected firms
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