A Sectoral Analysis of the Relationship between Options Volume and Earnings Announcements

Abstract

This study addresses the interactions between unusual options volume and earnings surprises, while accounting for sectoral differences among firms. Previous literature has found evidence of unusual activity in the options market during the announcement period but has little to offer regarding the predictability of earnings through options volume. In a study of 321 firms listed on the NYSE from 2013-2018, I find that there is evidence of unusual trading activity in the options market. On average, firms experience a 20% increase in options trading volume in the five days leading up to the announcement date. The consumer discretionary sector experiences the most unusual volume prior to earnings, and the information technology sector finds the most interest following an announcement. Additionally, the study finds that there is no significant relationship between options volume and earnings surprises but does not rule out the existence of private information in the options market. Lastly, I find that sectors with a higher concentration of mature firm experience less unusual volume, while emerging sectors experience the most interest during the announcement period, suggesting the possibility of information leaks and price inefficiency.