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Earnings and Options

 
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arthur
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PostPosted: Mon Jan 31, 2005 11:20 am    Post subject: Earnings and Options Reply with quote

Options players see big moves in Disney, Google
Mon Jan 31, 2005 01:00 PM ET

CHICAGO, Jan 31 (Reuters) - Options investors are bracing for sizable stock moves in Walt Disney Co. (DIS.N: Quote, Profile, Research) , Google Inc. (GOOG.O: Quote, Profile, Research) and Amazon.com Inc. (AMZN.O: Quote, Profile, Research) after they report earnings this week, according to an options analyst on Monday.
In a research note, Merrill Lynch derivative strategist Marko Kolanovic lists the anticipated price changes for 53 companies which may occur in the aftermath of their expected earnings announcements for the period of Jan. 31 to Feb. 4.

For example, Kolanovic found that the options market is forecasting a move up or down of about 4.5 percent or a swing of $1.27 when media and entertainment company Walt Disney reports after the close on Monday.

Another sizable mover could come from Web search leader Google of 7.1 percent in either direction or $13.58 when it reports on Tuesday.

In Amazon.com, the analyst wrote that the pricing of the Internet retailer's options suggests the stock will move up or down by 6.8 percent or $2.89 when it reports earnings on Wednesday.

Options prices can provide an idea of how much the options market anticipates certain shares to move over a period of time. The cost of the option or premium goes up as players bid up puts and calls to guard against a fall or position themselves for a rally on the stock.

Higher options prices mean the market believes that a larger percentage move in the stock is possible. That move is known as implied volatility.

Kolanovic compares the projected volatility of the first month contract for an equity option -- in this case, the contract that expires in February -- to the implied volatility of the two-month options contract for March. He then calculates the size of the expected earnings-related price move.

If the implied volatility of the first month is higher than the volatility of the second month option, then the options market indicates that earnings will move the stock.

If it is lower, then the market suggests that earnings will have little or no impact on the stock price.

Implied volatility measures as a percentage how much the options market thinks the stock price will move. It typically rises on uncertainty, before news events such as earnings.

Other large earnings-related stock moves in either direction could come from U.S. home builder Standard Pacific Corp. (SPF.N: Quote, Profile, Research) (2.7 percent) and U.S. disability insurer UnumProvident Corp. (UNM.N: Quote, Profile, Research) (5.0 percent). Both of which report earnings on Feb. 2 as well as telecommunications provider Sprint Corp. (FON.N: Quote, Profile, Research) (3.1 percent) and Internet company Ask Jeeves Inc. (ASKJ.O: Quote, Profile, Research) (9.3 percent).

Sprint and Ask Jeeves are due to report on Feb. 3.

The report cites 13 companies like U.S. brewer Anheuser-Busch Cos. Inc. (BUD.N: Quote, Profile, Research) and drug wholesaler Cardinal Health Inc. (CAH.N: Quote, Profile, Research) that may see very little movement as result of their earnings.
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