Information Leakage in Energy Derivatives around News Announcements

Abstract

We examine the behavior of US crude oil and natural gas futures options implied volatility based measures as proxies for information leakage around news announcements between 2007 and 2017. In the five days preceding news releases, we report abnormal changes in the levels of futures options implied volatility spreads and skew. In addition, we report a statistically significant relationship between abnormal announcement date returns and abnormal changes in pre-announcement implied volatility spreads/skew. Our findings indicate that at least some investors are informed about the details of future crude oil and natural gas news.

TOPICS: Options, derivatives

Key Findings

• • The study offers a unique examination of information leakage in crude oil and natural gas futures options prior to commodity specific news between 2007 to 2017.

• • We report abnormal changes in implied volatility spreads and skew in the five days prior to news announcements.

• • Pre-announcement abnormal options trading activity indicates that some traders have knowledge about the details of upcoming energy news.