Traders Reacting to Bad News: The SEC versus Goldman Sachs

This paper examines a specific case to shed light on the issue of how people trade during times of crisis, with specific focus on the options market and various options trading strategies. On April 16 th 2010 the SEC announced charges against Goldman, Sachs & Co. for alleged fraudulent dealings, causing a significant share price decline. I examine the choices that options traders made in response to this market event, in terms of both choice of strategy (such as long call, straddle etc.) and choice of option (maturity and strike price chosen). Volume in Puts spiked immediately, and evidence suggests that such trading was highly profitable for at least 30 minutes following the announcement. Traders also implemented volatility trades in the options market, although evidence suggests that they lost money on this activity. Trading in the weeks following the SEC announcement indicates that strong positive stock returns prompted increased trading in both Calls and Puts, while spikes in implied volatility discouraged such trading. Surprisingly, volume in volatility trades was not significantly affected by changes in implied