Informed options trading prior to M&A announcements: Insider trading

We document pervasive informed trading activity in equity options before M&A announce-ments, consistent with strategies yielding abnormal returns to informed investors: directional and volatility strategies for target and acquirer firms, respectively. For targets, this is demonstrated by positive abnormal volumes, especially for out-of-the-money and short-dated calls, excess implied volatility, higher bid-ask spreads, and a decrease in the slope of the term structure of implied volatility. For acquirers, abnormal volume arises for at-the-money options and stock-financed deals that have a higher uncertainty of deal completion. SEC litigations involving options trading before M&A announcements show strong similarities between insider trading characteristics and documented patterns of unusual options activity