Why Do Financial Intermediaries Buy Put Options from Companies?

Gyoshev, Stanley and Kaplan, Todd R. and Szewczyk, Samuel and Tsetsekos, George (2012): Why Do Financial Intermediaries Buy Put Options from Companies?

Abstract

In the 1990s, companies collected billions in premiums from peculiarly structured put options written on their own stock while almost all of these puts expired worthless. Buyers of these options, primarily �nancial intermediaries, lost money as a result. Although these losses might seem puzzling, by offering to buy put options from better informed parties, intermediaries receive private information about the issuing company. We fi�nd that the magnitude of changes and structural breaks in the stocks' �price trends and volumes around the put sales indicate that the intermediaries were indeed acting on this information and potentially made hundreds of billions of dollars.

• Item Type: MPRA Paper
• Language: English
• Keywords: Separating Equilibrium, Put Options, Information Acquisition, Strategic Trading
• Subjects: G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; G - Financial Economics > G1 - General Financial Markets > G18 - Government Policy and Regulation; G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation; G - Financial Economics > G2 - Financial Institutions and Services > G24 - Investment Banking ; Venture Capital ; Brokerage ; Ratings and Ratings Agencies; G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing ; Futures Pricing

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