Trading in the Options Market Around the Financial Analysts’ Consensus Revision

42 Pages Posted: 18 Jan 2013 Last revised: 18 Jun 2015

See all articles by Darren K. Hayunga

Darren K. Hayunga

University of Georgia - Department of Insurance, Legal Studies, Real Estate

Peter P. Lung

University of Texas at Arlington

Date Written: November 21, 2012

Abstract

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

Suggested Citation

Hayunga, Darren K. and Lung, Peter P., Trading in the Options Market Around the Financial Analysts’ Consensus Revision (November 21, 2012). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming, Available at SSRN: https://ssrn.com/abstract=2201840

Darren K. Hayunga (Contact Author)

University of Georgia - Department of Insurance, Legal Studies, Real Estate ( email )

Athens, GA 30602-6254
United States
706-542-1365 (Phone)

Peter P. Lung

University of Texas at Arlington ( email )

415 S West St Apt no 205
Arlington, TX 76019
United States

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