Finding options opportunities in insider buying – FULL GUIDE

TLDR; significant insider activity theoretically increases vol of the underlying, but IV is mispriced due to lack of liquidity in smaller cap options chains

As most people here know, insiders have a huge information advantage and their positioning can indicate their confidence in their own stock. While they can sell for many reasons (taxes, divorce, buying a boat), they only buy on the open market for one reason 🙂 they think the stock is undervalued

I am thinking about deploying this options strategy to leverage my returns, particularly before a known catalyst (e.g., earnings report or FDA approval for a drug).

The hypothesis

Given the lower liquidity in options markets, they may be underpriced as institutional investors don't find it worthwhile to connect the dots between live insider trade data and options data. The SEC limits insider trade data from being sent out at scale (they have strict limits), so it's unlikely algorithms are too involved here.

I think if an insider buys a lot of stock, there must be a significant catalyst upcoming, thus increasing the volatility of the stock, but will not yet be reflected into IV.

What's working so far for me

To turn this theory into a deployable strategy, I've created the following criteria to boost returns in long positions, so I am wondering if it can be further refined for options:

Criteria 1: Small caps Blue chip stocks may already have algorithms trading on this data, but lower market cap will not have institutional/algorithm investors due to the liquidity constraint, but the smaller the better.

Criteria 2: Materiality The purchase must represent a meaningful portion of their net worth or salary. I filter for trades above $100K in value. I also filter for trades that increase their positioning >10%. Anything lower is just not material. The best signs are when the insider goes all-in on their own stock. No one without significant positive info will materially put their net worth and career all into the same basket.

Criteria 3: Information asymmetry / undiscovered catalysts The best trades I have found are those where insiders have much more information than the public. So far, I've found Biotechnology and Gold companies to be the best. Biotech insiders will know interim data on their latest drugs before they are required to publish to market. Gold insiders know assay results or new discoveries. They know that an imminent press release is coming up with a discovery / FDA announcement.

The best trade I made to-date has been Alumis Inc, where the chairman of the board has been adding $1.5mn every two weeks to his position. Immediately stood out among all the other trades, and shares climbed in the months following from $5 to $25 with major news with their pharma pipeline. Not sure how the chairman is allowed to do that, but I am glad to hitchhike off his greed.

Overall, a key part of the trading strategy depends on trading the information asymmetry in low liquidity environments, such that retail investors have an edge where the big algorithms cannot.

I am trying to refine this strategy further for the options market. Anyone try anything similar or have improvements to the strategy?