Informed Options Trading Before Fda Drug Advisory Committee Meetings

Abstract

The Food and Drug Administration uses committees of experts to evaluate potential new drugs. Weeks before they meet, the experts receive nonpublic reports from drug firms and FDA staff. We find significant abnormal options trading before meeting dates and report creation dates, particularly for small firms. Abnormal volume significantly predicts post-meeting stock returns. Informed traders prefer out-of-the-money options, and choose maturities to cover the dates when reports are publicly released. They prefer to sell options close to the meeting date, perhaps to capture returns from both expected stock price changes and the sharp drop in implied volatility following the meetings.