Informed Options Trading prior to M&A Announcements: Insider Trading?∗

We investigate the possibility of insider trading in equity options around major informational events such as corporate mergers and acquisitions (M&A) for a sample of 1,859 US events, fo-cusing on both the target and the acquirer. Our goal is to quantify the likelihood of informed trading and information leakage based on trading volume and implied volatility attributes. We further focus our attention on options strategies which, in anticipation of public news announce-ments and the presence of private information, should result in abnormal returns to insiders. We find a highly positive abnormal trading volume and excess implied volatility in anticipation of M&A announcements, with stronger effects for OTM call options on the target company. We further document a decrease in the term structure of implied volatility and an average rise in percentage bid-ask spreads of approximately 20 percentage points prior to the announcements