Speculation or hedging?—Options trading prior to FOMC announcements.

This paper investigates options trading activity before Federal Open Market Committee (FOMC) announcements. We find evidence that informed traders use options to speculate on their private information for the upcoming FOMC announcements. Specifically, abnormal trading volume of call options on S&P 500 index during the preannouncement window positively predicts postannouncement index returns, and this predictability mainly comes from near‐the‐money call options. Moreover, we further break down trading volume based on the direction of trades and show that buyer‐initiated call option trading volume positively predicts postannouncement index returns. We find no evidence that investors use options to hedge postannouncement market uncertainty. [ABSTRACT FROM AUTHOR]