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Why Do Financial Intermediaries Buy Put Options from Companies?

Gyoshev, Stanley and Kaplan, Todd R. and Szewczyk, Samuel and Tsetsekos, George (2013): Why Do Financial Intermediaries Buy Put Options from Companies?

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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.

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