Exercising options insider trading
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Their theory is that insiders with a negative take on their company will probably sell a larger percentage of their holdings than if the sale were for liquidity or portfolio-management needs. Selling only a small fraction of their holdings is actually a bullish sign, the authors suggest. Using insider transactions in the U. The performance of the stocks in the subsequent three months was then measured against the broad markets. They found that the larger the percentage of shares sold compared with the shares owned, the better the quality of the information and the larger the potential for excess returns.
When insiders sell a large number of shares and a large portion of what they own, they are more likely to be motivated by perceived overpricing of their stocks, the authors conclude.
When Insiders Exercise Options, Look Out
However, a small volume of sales up against the total holdings may indicate that the owners need to raise money but still think highly of their company, they say. Options are cashed in at a specified price and, therefore, are not counted in the ratio. But they are included when an insider sells shares subsequently acquired by exercising the options.
Looking at the four years to inclusive, University of Michigan finance professor H. Nejat Seyhun recently tried to determine how much these ratios may have been skewed by the exercising of options and their subsequent sales.
Executive Stock Option Exercises and Inside Information
This column is not meant as investment advice; it is instead meant to provide insight into the methods of insider trading. At time of publication, Gabele held no position in any of the companies discussed in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Gabele appreciates your feedback at.
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