▶ Full Post Text
Corporate insiders know more about the company than anyone in the professional and retail community can ever know. There is conflicting research about the value of tracking and mimicking the trades of insiders, as is usual with all academic research.
However, thus far no public paper has synthesized market conditions and corporate insider trading which are quantifiable into a multi-factor quantitative model. In addition, and this it not unexpected, no paper has attempted to formulate opportunistic trades when such model offers a signal to buy or sell a stock.
The idea is to use several combined market conditions and insider trading information and create a weekly scan or stocks which are poised for mean reversion over the 30-45 days or so, and to trade the signals with options, but in a way that if the move does not happen in the time frame, the loss should be minimal.
So the question is what are these market conditions and how do we formulate the trades?
I start with [Lakonishok](https://www.jstor.org/stable/2696757) who finds that insiders trade in a contrarian way, and buy stock, rather than sell, on asymmetric information, and the firms they trade and work in are small. This makes sense to me and these factors are easily quantifiable. Next, I agree with [Kacperczyk and Pagnotta](https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2695197) that informed trading happens in periods of high volume, high volatility and high liquidity, so that informed traders can disguise their trading more easily. One key metric in their paper is OTM option volume versus total volume, tracked as ratio, but since this requires a lot of modeling, I will manually examine the OTM volume and open interest as a final qualification of the trade. Finally, I will not blindly chase the trade with OTM call options, but I will create spreads which will benefit from price increases, but will limit the downside risk, e.g. call ratio spreads. Each trade will be different, and it will match not only the implied move in the underlying, but also it will depend on the option prices for the stock and the liquidity as very few small firms have liquid options.
A simple search for beaten down stocks with insider purchasing activity are BMI and EFOR
https://preview.redd.it/zomfxo0hgsxg1.png?width=1261&format=png&auto=webp&s=934aa56f4a42fc8781b85187a5e1d2e4265cfbca
Ignoring BMI because their option markets are dumb, I bought EFOR June 25 calls to put my money where my mouth is. I will spread it off in the coming days, depending on how it moves.
https://preview.redd.it/d8suvyxagsxg1.png?width=744&format=png&auto=webp&s=b363d9742ce9c8c66fb42959994c81b60eba4580
Good luck to all who trade this stock and options, sending my regards to you all!
PS: here are the insider purchases - CEO said "nah we are good, I will go buy some shares worth a cool million", and a bunch of other people did the same.
https://preview.redd.it/iavc5mycosxg1.png?width=1292&format=png&auto=webp&s=27dc53bd908ea0535112eff8e98d64da2f600a63