Informed Options Trading Prior to Takeover Rumors

We examine derivatives trading prior to takeover rumors in a sample of 1,638 publicly traded U.S. firms. The volume of options traded is abnormally high over the 5-day pre-rumor period, primarily due to the number of out-of-the-money call options traded. In addition, the direction of option trades (abnormal call volume minus abnormal put volume) prior to takeover rumors predicts forthcoming takeover announcements and rumor date returns....