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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 (2016): Why Do Financial Intermediaries Buy Put Options from Companies?

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Companies have collected billions in premiums from privately sold put options written on their own stock, yet almost all of these puts expired worthless and their owners lost money as a result. Although these losses seem puzzling, we model how by offering to buy put options from better informed parties, investment banks receive private information about the issuing company. Empirically, we find a 12% increase in the stock prices and a 40% increase in the trading volumes around the put sales. An examination of 13D filings reveals that upper management insiders increased their long position on the stock around the put sale - consistent with them having private information. However, the magnitude of the volumes and the lack of change in the shares outstanding indicate that other informed-of-the-put-sale parties might also have acted. By examining 13F filings, we find no evidence that these parties were institutional investors.

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