Why Do Financial Intermediaries Buy Put Options from Companies?

Abstract

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