contract on 14 companies in various business sectors traded in the Chicago Board Options Exchange from January 1996 to April 2006 analyzing approximately 1.5 million of option contracts. In total 37 transactions are identiﬁed as informed trades: 6 occurring in the days leading up to merger and acquisition (M&A;) announcements, 14 before quarterly ﬁnancial/earnings related statements, 13 related to the terrorist attacks of September 11th, and 4 which could not be identiﬁed. For example four informed trades surrounding M&A; announcements are detected in the airline sector. Two of them involved put options on American Airlines and United Airlines stock traded on May 10th and 11th, 2000, namely two weeks before UAL’s acquisition of US Airways was announced.

These trades generated a total gain of almost $3 million.1 Another informed trade in a put option with underlying Delta Air Lines occurred a few weeks before the public announcement on January 21st, 2003 of the planned alliance among Delta, Northwest and Continental. In this case the total

gain was more than $1 million. As noted in e.g. Keown and Pinkerton (1981) and Cao, Chen, and Griﬃn (2005), takeover announcements are ideal events for studying information discovery in the security price formation process. Whereas trades made before scheduled announcements might be based on speculative bets, takeover announcements are not planned and trades prior to such events are likely to be started by traders who possess private information as detected by our method. Other detected informed trades can be associated to announcements related to drops in sales, production scale backs, and earnings shortfalls. For example three informed trades on put options with underlying Philip Morris stock are detected a few days before three separate legal

1As reported in the New York Times edition of May 25th, 2000, AMR was considered the company most threatened by the merger, explaining therefore the 17% drop in its stock in the days after the public announcement. According to James Goodwin, chairman and chief executive of UAL, two major hurdles would challenge UAL: “the ﬁrst is to get US Airways shareholders to approve this transaction. [The second] is the regulatory work, which revolves around the Department of Transportation, the Department of Justice and the European Union”. The skepticism on Wall

Street was immediately reﬂected on UAL shares which declined $7.19 to $53.19 on the announcement day.