Suppose I have a friend working for a biotech company which has a drug on clinical trial. My friend DOES NOT know if the result will be good or bad, but he knows when the result will be announced. when the result is announced, either the result is good or bad, its stock price will change dramatically. so if I buy call and put option of the stock before the result is announced, no matter the result, i will surely make a profit on one side. is that an insider-trading?
is this insider trading?
- Thread starter trend2009
- Start date
have you read the legal definition of insider trading?
I would think it would depend on how significant the drug is for the company and what the company is publicly telling the markets vs what he's telling you.
If the drug were a big deal I would generally consider the date to be material.
The problem you'll have is you probably won't have traded options before and then suddenly before a stock moves 30% +/- you buy some options. That won't look good if the trades are investigated. You're also a man in the street so it's easy to go after you rather than someone who is connected. You'll be easy meat for the regulators.
The price of options is based on the volatility of the underlying. If an insider from a firm conveys non-public information on an event that will impact that volatility, and hence the options price, and you trade on it, then you're in pretty straightforward violation of insider trading laws. And as AbbotAle pointed out, the market surveillance on these things is pretty tight and people get caught all the time for doing what you're posing. In addition, with the new SEC bounty program, it would be in Baron's best interest to report you, or any of us, because we'll receive an award when you're caught!
One time is luck, two times maybe are a coincident and more than three times will make you look suspicious to them. That said, it is just a matter of time before regulators finding it out, based on your trading patterns. So, I'd stay away from doing anything illegal because it doesn't worth it to try.
if you put an equal amount of money in puts and calls before the result is announced, and if there's a big move in either direction...you will for sure lose half of your investment due to being wrong on the direction but can potentially make 5+ times on the other half
has anyone tried this strategy?
has anyone tried this strategy?
If you have insider info and no-one knows an announcement is coming, you would profit from the increased volatility of the options. If it's a known announcement, the increased volatility will be priced in. You're betting that everyone who is selling those options didn't get the memo on the announcement or is a fool, and as I've found out if your strategy depends on your counterparty being a fool then I'm probably the fool. Case in point, 20+ years ago before the internet to help me and an education in finance, I tried exactly that on a biotech stock. The announcement happened as scheduled, the move happened, and I still lost money because the options were so expensive in the first place. A good first lesson in market efficiency for me, one that you can avoid because there's a community that's been there and suffered that completely avoidable loss already to tell you about it.