Question

Morse refers to 2 market characteristics that signify that insiders are trading on their private information. What are they?

Answer 1

SEC defines insider trading as any securities transaction made when the person behind the trade is aware of nonpublic material information, and is hence violating his or her duty to maintain confidentiality of such knowledge.

1.sudden dumping or buying in large lots by anyone from the company

2.large purchases of out-of-the-money options just ahead of a corporate event. OTM options represent large leverage, risky bets. 5 delta options have only a 10% chance of ever being in-the-money but they cost very little thus can represent huge leverage, often 100x or more. If there are thousands and 10’s of thousands of these ‘lottery-ticket’ options being bought ahead of a major announcement it is very suspicious.

3.Insider trading can be detected when you observe the price chart is almost flat for six months or a year. Here accumulation of shares are in progress without increasing the price. Whenever the price is going a little bit higher the traders are selling and buying their own shares in cyclic order. Sometimes to make fool they are placing sell order at abnormal high price to display the selling pressure