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Matt Levine

There Might Be a Lot of Insider Trading

And it's in out-of-the-money call options! My favorite thing to tell you not to trade!

As I may have mentioned over and over and over and over and over again, the first rule of insider trading is just don't insider trade, but the second rule is: If you have inside information about an upcoming merger, don't buy short-dated out-of-the-money call options on the target. The SEC will get you! What I haven't emphasized, however, is that derivatives can be replicated in various ways, so you can use other options to get similar results without trading in the Forbidden Option. This would not technically violate the second rule of insider trading, though I cannot wholeheartedly recommend it since it would violate the first.

Andrew Ross Sorkin has a column today about a new study of options trading before merger announcements, by Patrick Augustin, Menachem Brenner and Marti Subrahmanyam. And ... I mean, it's almost too perfect. Everything you'd predict, if you were maximally cynical, the researchers found. Here are the astounding highlights: