Informed trading around earnings announcements—Spot, futures, or options?

Abstract

Recent literature reports higher single stock options (SSO) volume before earnings announcements (EA). There are no studies that explore single stock futures (SSF) in this context because of illiquid SSF markets in developed countries. Similar to SSO, SSF provide embedded leverage and facilitate short selling although at a lower cost, but do not provide downside‐risk protection. India’s liquid SSO and SSF provide a unique setting to study the preference of informed traders. We observe an increase in both SSO and SSF volume before EA. Further, SSF dominate SSO possibly due to SSO becoming expensive before EA and higher information leakage in India.