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Do option markets substitute for stock markets? Evidence from trading on anticipated tender offer announcements |
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| Authors: | Tom Arnold Lance Nail Terry Nixon |
| Institution: | a University of Richmond, USA b University of Virginia, USA c Department of Finance, Economics, and Quantitative Methods, University of Alabama at Birmingham, 1150 10th Avenue South, Birmingham, AL 35294, USA d Miami University, USA |
| Abstract: | Using a sample of cash tender offers occurring between 1993 and 2002, we find evidence that the options market has become the preferred venue for traders attempting to profit on anticipated announcements. Options offer advantages relative to stocks. Traders gain leverage by trading in options and multiple options contracts on an individual stock. The results of our study indicate that a substitution effect does exist. Abnormal volume in the option market replaces abnormal volume in the stock market prior to cash tender offer announcements, and this abnormal option volume precedes abnormal stock volume for targets with or without traded options. |
| Keywords: | G10 G14 G34 K22 K42 |
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