February 14, 2006                                    Equity Volatility Snapshot      Ryan Renicker, CFA            •     I...
Equity Derivatives Strategy | Equity Volatility Snapshot                                  Industry Returns and Changing Ri...
Equity Derivatives Strategy | Equity Volatility Snapshot                                 Expiration Only 3 Days Away: Stoc...
Equity Derivatives Strategy | Equity Volatility Snapshot                                    Lehman Brothers Volatility Scr...
Equity Derivatives Strategy | Equity Volatility Snapshot                                   Earnings Watch: Companies Repor...
Equity Derivatives Strategy | Equity Volatility Snapshot                              Volatility Screen User Interface    ...
Equity Derivatives Strategy | Equity Volatility SnapshotAnalyst Certification:The respective research analysts responsible...
Equity Derivatives Strategy | Equity Volatility SnapshotDistribution of Ratings:Lehman Brothers Equity Research has 1859 c...
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Options and Volatility Comparisons Across Industry Groups

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Actionable trade ideas for stock market investors and traders seeking alpha by overlaying their portfolios with options, other derivatives, ETFs, and disciplined and applied Game Theory for hedge fund managers and other active fund managers worldwide. Ryan Renicker, CFA

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Transcript of "Options and Volatility Comparisons Across Industry Groups"

  1. 1. February 14, 2006 Equity Volatility Snapshot Ryan Renicker, CFA • Industry group returns and volatility. We analyze last week’s returns and changes in implied 1.212.526.9425 volatility across S&P 500 industry groups. This, combined with changes in call and put skews, canryan.renicker@lehman.com shed light on the risk expectations and potential directional biases the option market is pricing for Devapriya Mallick each underlying industry group. 1.212.526.5429 dmallik@lehman.com • Expiration Watch. We highlight call and put strikes that are within 1% of the stock’s closing price having high open interest relative to the average volume in the underlying. This might indicate the stock is more likely to become “pinned” to the respective strike on expiration. • Volatility Screen/Earnings Watch. We update our Volatility Screen to identify stocks possibly having rich or cheap options. We also update our Earnings Watch to estimate the expected stock price reaction the options market is pricing in for upcoming earnings releases.Lehman Brothers does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict ofinterest that could affect the objectivity of this report.Customers of Lehman Brothers in the United States can receive independent, third-party research on the company or companies covered in this report, at no cost to them,where such research is available. Customers can access this independent research at www.lehmanlive.com or can call 1-800-2LEHMAN to request a copy of this research.Investors should consider this report as only a single factor in making their investment decision.PLEASE SEE ANALYST(S) CERTIFICATION AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 7.
  2. 2. Equity Derivatives Strategy | Equity Volatility Snapshot Industry Returns and Changing Risk Expectations We analyze last week’s1 performance of S&P 500 industry groups, and incorporate option market information to infer how each group’s risk expectations and potential directional biases (changes in put or call skews) reacted to each respective industry’s performance. As Figure 1 illustrates, last week’s returns tended to be negatively correlated with changes in implied volatility (which is typical). In Figure 2, we present last week’s changes in put and call skews for each industry group2. Last week, the Telecom Services industry group gained 2.3% although its weighted-average 3-month ATM implied volatility rose as well, consistent with its trend since late January. This industry group also had the highest increase in its weighted-average call skew, possibly indicating a decline in demand for out-of-the-money calls on Telecom names. Implied volatility for the Auto & Components industry group ended higher last week, after the group declined about 1.5%. However, the industry’s put skew and call skew increased during the retracement, which we believe could be a signal that investors could have been buying downside protection and selling upside participation. Another industry group having interesting volatility vs. performance patterns was Software & Services, within which ATM implied volatility remained relatively flat, even as the group declined about 1.2% for the week. In addition, its put skew declined and at-the-money implied volatility rose relative to out-of- the-money call implied volatility.Figure 1: Last Week’s Performance vs Change in 3M Implied Vol. Figure 2: Last Week’s Change in Put and Call Skew (in vol pts.) Put Skew Change Call Skew Change Tech Hard & Equip Industry Group (1 week) (1 week) Telecom Svc House & Pers Prod 0.03% -2.41% Comml Svc & Suppl Capital Goods Semi & Semi Equip 0.29% -0.64% Insurance Pharma & Biotech 0.09% -0.43% H Care Equip & Svc Utilities 0.10% -0.25% Semi & Semi Equip Food Bev & Tobacco 0.33% -0.22% Transportation Insurance -0.10% -0.19% Pharma & Biotech Cons Dur & Apparel 0.13% -0.13% Consumer Services Comml Svc & Suppl 0.20% -0.12% Banks Capital Goods -0.13% -0.11% Media Tech Hard & Equip 0.40% -0.06% Retailing Energy -0.10% -0.06% Food Bev & Tobacco Banks 0.09% -0.03% Divers Financ Divers Financ 0.12% -0.03% Food & Stpls Retail Transportation 0.06% -0.02% Real Estate H Care Equip & Svc 0.11% 0.00% Utilities Real Estate 0.37% 0.00% House & Pers Prod Materials -0.36% 0.01% Softw are & Services Retailing 0.10% 0.03% Auto & Components Cons Dur & Apparel Media -0.92% 0.13% Materials Consumer Services -0.04% 0.23% Energy Food & Stpls Retail 0.17% 0.45% Software & Services -0.16% 0.85% -7% -6% -5% -4% -3% -2% -1% 0% 1% 2% 3% 4% Auto & Components 0.38% 1.14% 1-w eek Return Implied Vol Change (1 w eek) Telecom Svc 0.29% 1.38%Source: Lehman Brothers, OptionMetrics Source: Lehman Brothers, OptionMetrics 1 We define “last week” as the time period between the close on 2/6 and the close on 2/13. 2 We calculate each industry group’s put skew by taking the difference between the market-cap weighted 20 delta put implied volatility and ATM implied volatility for each constituent within the industry group. We calculate the call skew by taking the difference between the market-cap weighted-average ATM implied volatility and the 20 delta call implied volatility for each constituent within the industry group. February 14, 2006 2
  3. 3. Equity Derivatives Strategy | Equity Volatility Snapshot Expiration Only 3 Days Away: Stocks to Watch We found the return distribution on expiration for stocks closing near a strike price before expiration tends to have a higher probability of returns relatively close to 0%, versus the average S&P 500 stock. In addition, the probability of stocks becoming “pinned” to their respective strike price tends to be increase if their open interest of contracts outstanding is relatively high versus their average daily volume3. This phenomenon is possibly due to delta-hedging activity among traders who are long gamma, which is likely to dampen moves in the underlying since it involves buying the underlying shares as their price declines and selling shares as they rise. With expiration only 3 days away (2/17), we highlight the calls and puts (for stocks within the S&P 500) expiring on Friday whose strikes are within 1% of last night’s closing price for each respective stock. Figure 3 and Figure 4 display the strike prices having the largest number of contracts outstanding as a proportion of the average daily volume in their underlying. The PRU 75 strike, HSP 45 strike and UPS 75 strike have the highest total open interest (puts + calls) as a proportion of their respective average daily stock volumes.Figure 3: Calls With Highest Open Interest / Volume Ratio Figure 4: Puts With Highest Open Interest / Volume Ratio Open Open Open Average Stock Distance from Open Average Stock Distance from Ticker Strike Close (2/13) Interest / Ticker Strike Close (2/13) Interest / Interest Volume (20d) Closing Price Interest Volume (20d) Closing Price Volume VolumePRU 75 11,657 74.61 1,935,455 0.5% 60% PRU 75 7,301 74.61 1,935,455 0.5% 38%HSP 45 3,708 45.26 632,450 0.6% 59% HSP 45 2,132 45.26 632,450 0.6% 34%KSS 45 19,465 45.15 3,969,209 0.3% 49% UPS 75 9,515 75.03 2,878,580 0.0% 33%UPS 75 13,047 75.03 2,878,580 0.0% 45% ABK 75 1,650 75.48 540,645 0.6% 31%SIAL 65 1,533 64.87 397,547 0.2% 39% TIN 45 2,945 44.62 1,002,500 0.9% 29%SHLD 120 4,905 119.28 1,391,904 0.6% 35% COP 60 32,177 59.45 12,281,621 0.9% 26%RAI 100 2,014 100.94 605,870 0.9% 33% IBM 80 16,988 80.44 6,948,270 0.5% 24%ABK 75 1,669 75.48 540,645 0.6% 31% IP 32.5 6,574 32.7 2,823,560 0.6% 23%ABT 42.5 12,866 42.83 5,125,129 0.8% 25% AMZN 37.5 18,090 37.86 8,220,290 1.0% 22%GDT 75 12,683 74.9 5,168,400 0.1% 25% KMI 90 1,871 90.44 900,515 0.5% 21%HD 40 20,227 39.7 8,425,745 0.8% 24% SHLD 120 2,796 119.28 1,391,904 0.6% 20%COH 35 6,763 35.33 2,861,535 0.9% 24% CMI 100 1,744 99.5 875,985 0.5% 20%GD 120 2,071 119.92 881,270 0.1% 24% GDT 75 9,576 74.9 5,168,400 0.1% 19%MS 60 8,826 59.81 3,840,444 0.3% 23% WHR 85 1,965 85.83 1,090,820 1.0% 18%AXP 52.5 13,156 53.02 5,777,820 1.0% 23% AA 30 9,445 30.24 5,778,825 0.8% 16%JPM 40 26,350 39.77 11,681,051 0.6% 23% PD 140 5,529 139.84 3,404,610 0.1% 16%AT 60 5,320 59.9 2,362,020 0.2% 23% ADP 45 4,253 45.41 2,627,360 0.9% 16%NKE 85 5,465 84.28 2,450,665 0.9% 22% KSS 45 6,356 45.15 3,969,209 0.3% 16%BOL 70 1,927 70.05 907,370 0.1% 21% HD 40 13,439 39.7 8,425,745 0.8% 16%TIN 45 2,128 44.62 1,002,500 0.9% 21% COH 35 4,324 35.33 2,861,535 0.9% 15%CLX 60 2,003 60.31 1,013,735 0.5% 20% CLX 60 1,521 60.31 1,013,735 0.5% 15%IBM 80 13,630 80.44 6,948,270 0.5% 20% MAS 30 4,015 29.91 2,714,950 0.3% 15%TGT 55 7,373 54.54 3,965,574 0.8% 19% NUE 80 4,682 79.36 3,181,790 0.8% 15%KLAC 52.5 8,758 52.89 4,740,525 0.7% 18% GS 140 5,814 139.65 4,064,250 0.3% 14%CMI 100 1,564 99.5 875,985 0.5% 18% XOM 60 30,370 59.6 21,462,878 0.7% 14%DG 17.5 5,982 17.41 3,402,770 0.5% 18% DD 40 6,975 40.15 5,245,469 0.4% 13%AET 100 3,740 99.5 2,159,740 0.5% 17% IPG 10 3,228 10.08 2,448,130 0.8% 13%DD 40 8,772 40.15 5,245,469 0.4% 17% HUM 50 2,964 50.42 2,386,240 0.8% 12%COP 60 19,952 59.45 12,281,621 0.9% 16% CI 120 1,351 119.69 1,102,635 0.3% 12%PG 60 12,615 59.44 7,924,454 0.9% 16% YUM 50 1,686 50.09 1,420,765 0.2% 12%Source: Lehman Brothers, OptionMetrics Source: Lehman Brothers, OptionMetrics 3 Please see our report Impact of Option Expiration on Underlying Price Changes, Options Strategy Monthly, February 2006 for further details. February 14, 2006 3
  4. 4. Equity Derivatives Strategy | Equity Volatility Snapshot Lehman Brothers Volatility Screen We update the list of stocks identified by the Lehman Brothers Volatility Screen as possibly having rich or cheap options. This screen allows investors to identify potentially rich or cheap one or three month options to efficiently express directional views on the underlying stock or identify attractive long or short volatility candidates. In Figure 5, we present the current list of stocks having relatively rich options.Figure 5: Stocks Displaying “Rich” Volatility Characteristics Std Devs from Std Devs from Std Devs from Lehman Expected 3-Month Lehman Mean (3-Month Mean (3-Month Mean (3-Month Ticker Name GICS Sector Company Price Earnings Implied Rich/Cheap Sector View Implied vs Implied vs Implied vs S&P Rating Date Volatility Realized) Sector) 500)AAPL APPLE COMPUTER INC Information Technology 2-Equal weight 2-Neutral 64.71 4/13/2006 48% 1.2 1.2 1.4 RichALEX ALEXANDER & BALDWIN INC Industrials 0-Unrated 0-Unrated 47.45 4/27/2006 29% 1.3 1.6 1.6 RichALL ALLSTATE CORP Financials 1-Overweight 1-Positive 52.64 4/20/2006 19% 1.2 1.5 1.5 RichASO AMSOUTH BANCORPORATION Financials 3-Underweight 2-Neutral 26.92 4/19/2006 19% 1.5 1.6 1.5 RichAVP AVON PRODUCTS INC Consumer Staples 3-Underweight 2-Neutral 27.24 5/2/2006 29% 1.1 1.5 1.4 RichBEC BECKMAN COULTER INC Health Care 0-Unrated 0-Unrated 58.71 2/17/2006 29% 1.8 2.0 2.0 RichBHI BAKER HUGHES INC Energy 2-Equal weight 1-Positive 69.26 2/16/2006 39% 1.6 1.6 4.3 RichBKH BLACK HILLS CORP Utilities RS-Rating Suspe2-Neutral 34.37 5/9/2006 23% 2.3 1.8 1.6 RichBLI BIG LOTS INC Consumer Discretionary 0-Unrated 0-Unrated 13.22 2/23/2006 40% 1.9 1.7 1.6 RichBTU PEABODY ENERGY CORP Energy 1-Overweight 1-Positive 85.51 4/19/2006 47% 1.6 1.5 2.0 RichCAKE CHEESECAKE FACTORY (THE) Consumer Discretionary 2-Equal weight 2-Neutral 36.19 4/19/2006 30% 2.3 1.4 1.8 RichCAT CATERPILLAR INC Industrials 2-Equal weight 2-Neutral 68.62 4/24/2006 27% 1.3 1.9 1.8 RichDELL DELL INC Information Technology 1-Overweight 2-Neutral 31.57 2/16/2006 26% 1.0 1.5 1.8 RichDLX DELUXE CORP Industrials 0-Unrated 0-Unrated 26.17 4/28/2006 26% 1.2 2.6 2.4 RichDNR DENBURY RESOURCES INC Energy 2-Equal weight 1-Positive 26.55 2/23/2006 46% 2.8 1.4 2.1 RichDVN DEVON ENERGY CORPORATION Energy 1-Overweight 1-Positive 58.00 5/4/2006 39% 1.2 1.9 2.1 RichEOP EQUITY OFFICE PROPERTIES TR Financials 3-Underweight 2-Neutral 30.02 4/28/2006 22% 1.4 1.2 1.1 RichESRX EXPRESS SCRIPTS INC Health Care 2-Equal weight 2-Neutral 91.63 2/22/2006 37% 1.8 2.4 2.1 RichEXC EXELON CORP Utilities 1-Overweight 3-Negative 55.59 4/25/2006 25% 2.4 1.6 1.4 RichFLR FLUOR CORP Industrials 2-Equal weight 2-Neutral 81.12 3/1/2006 29% 2.7 1.3 1.3 RichFPL FPL GROUP INC Utilities RS-Rating Suspe3-Negative 41.66 4/26/2006 19% 1.3 1.0 1.2 RichGM GENERAL MOTORS CORP Consumer Discretionary 2-Equal weight 3-Negative 22.00 4/19/2006 70% 1.0 2.1 2.0 RichGPC GENUINE PARTS CO Consumer Discretionary 2-Equal weight 3-Negative 42.14 2/21/2006 20% 2.0 1.6 1.8 RichHNZ HJ HEINZ CO Consumer Staples 2-Equal weight 3-Negative 35.26 2/28/2006 19% 2.9 2.9 2.2 RichHPQ HEWLETT-PACKARD CO Information Technology 1-Overweight 2-Neutral 31.74 2/15/2006 32% 1.7 2.3 2.4 RichISRG INTUITIVE SURGICAL INC Health Care 0-Unrated 0-Unrated 101.02 4/21/2006 60% 1.4 2.4 2.2 RichJP JEFFERSON-PILOT CORP Financials RS-Rating Suspe2-Neutral 58.46 4/27/2006 29% 4.7 5.0 4.8 RichKRI KNIGHT RIDDER INC Consumer Discretionary 3-Underweight 3-Negative 62.48 4/13/2006 25% 3.0 2.1 1.8 RichKSE KEYSPAN CORP Utilities 2-Equal weight 2-Neutral 36.03 2/24/2006 17% 1.2 1.2 1.9 RichLEA LEAR CORP Consumer Discretionary 3-Underweight 3-Negative 22.36 4/21/2006 53% 1.7 2.7 2.5 RichLTR LOEWS CORP Financials 0-Unrated 0-Unrated 95.72 2/16/2006 21% 2.5 1.7 1.5 RichMAS MASCO CORP Industrials 2-Equal weight 2-Neutral 29.91 2/14/2006 25% 1.8 1.8 1.8 RichMHK MOHAWK INDUSTRIES INC Consumer Discretionary 2-Equal weight 2-Neutral 80.63 2/15/2006 25% 1.5 2.1 2.4 RichMI MARSHALL & ILSLEY CORP Financials 2-Equal weight 2-Neutral 42.23 4/12/2006 19% 2.9 2.3 1.9 RichMO ALTRIA GROUP INC Consumer Staples 2-Equal weight 1-Positive 71.25 4/20/2006 28% 1.4 1.4 1.4 RichMRBK MERCANTILE BANKSHARES CORPFinancials 1-Overweight 2-Neutral 37.00 4/26/2006 22% 3.2 2.8 2.6 RichMYG MAYTAG CORP Consumer Discretionary 0-Unrated 0-Unrated 16.61 4/21/2006 64% 1.9 2.8 2.9 RichNAV NAVISTAR INTERNATIONAL Industrials 0-Unrated 0-Unrated 27.32 2/28/2006 39% 1.2 1.7 1.7 RichNUE NUCOR CORP Materials 2-Equal weight 1-Positive 79.36 4/21/2006 43% 1.9 1.0 1.6 RichOKE ONEOK INC Utilities 1-Overweight 2-Neutral 26.59 2/22/2006 24% 2.3 1.0 1.2 RichORI OLD REPUBLIC INTL CORP Financials 0-Unrated 0-Unrated 21.26 4/28/2006 20% 1.1 1.1 1.2 RichREG REGENCY CENTERS CORP Financials 0-Unrated 0-Unrated 61.83 5/3/2006 22% 1.9 1.3 1.3 RichRL POLO RALPH LAUREN CORP Consumer Discretionary 0-Unrated 0-Unrated 55.00 6/9/2006 29% 1.2 1.2 1.4 RichRYN RAYONIER INC Financials 0-Unrated 0-Unrated 41.14 4/26/2006 21% 1.1 1.2 1.2 RichSAFC SAFECO CORP Financials 1-Overweight 1-Positive 51.66 4/19/2006 23% 1.9 2.3 2.1 RichSFG STANCORP FINANCIAL GROUP Financials 3-Underweight 2-Neutral 51.70 4/26/2006 27% 1.6 2.1 1.9 RichSHW SHERWIN-WILLIAMS CO/THE Consumer Discretionary 0-Unrated 0-Unrated 53.03 4/21/2006 27% 2.3 3.5 2.8 RichSII SMITH INTERNATIONAL INC Energy 2-Equal weight 1-Positive 38.52 4/25/2006 41% 1.3 1.3 4.3 RichSOV SOVEREIGN BANCORP INC Financials RS-Rating Suspe1-Positive 20.64 4/19/2006 26% 1.5 1.4 1.4 RichSTR QUESTAR CORP Utilities 1-Overweight 2-Neutral 74.92 2/14/2006 31% 1.4 1.2 1.2 RichSWN SOUTHWESTERN ENERGY CO Energy 0-Unrated 0-Unrated 32.64 2/28/2006 56% 2.1 1.2 1.5 RichTRB TRIBUNE CO Consumer Discretionary 3-Underweight 3-Negative 30.74 4/13/2006 24% 1.6 1.5 1.4 RichVRX VALEANT PHARMACEUTICALS INTHealth Care 0-Unrated 0-Unrated 17.08 2/24/2006 72% 2.3 2.6 2.5 RichWHR WHIRLPOOL CORP Consumer Discretionary 0-Unrated 0-Unrated 85.83 4/21/2006 30% 1.1 1.1 1.4 RichWMI WASTE MANAGEMENT INC Industrials 1-Overweight 1-Positive 33.04 2/14/2006 20% 1.2 1.0 1.8 RichWTR AQUA AMERICA INC Utilities 0-Unrated 0-Unrated 27.28 2/17/2006 30% 3.6 1.9 1.8 RichX UNITED STATES STEEL CORP Materials 2-Equal weight 1-Positive 54.28 4/26/2006 55% 2.6 3.1 4.1 RichSource: Lehman Brothers, OptionMetrics, Bloomberg, FAMENote: This screen does not exclude stocks with illiquid options. Investors should consider liquidity before entering into an options position. Stocks that appear as unrated are eithernot covered by Lehman Brothers fundamental analysts or are currently subject to research restrictions. Our universe includes stocks included in either the S&P 500 or the NDX. In Figure 6, we provide the current list of stocks having relatively cheap options.Figure 6: Stocks Displaying “Cheap” Volatility Characteristics Std Devs from Std Devs from Std Devs from Lehman Expected 3-Month Lehman Mean (3-Month Mean (3-Month Mean (3-Month Ticker Name GICS Sector Company Price Earnings Implied Rich/Cheap Sector View Implied vs Implied vs Implied vs S&P Rating Date Volatility Realized) Sector) 500)ACS AFFILIATED COMPUTER SVCS-A Information Technology 0-Unrated 0-Unrated 62.49 4/21/2006 23% -2.4 -1.9 -1.2 CheapC CITIGROUP INC Financials 1-Overweight 1-Positive 45.68 4/13/2006 15% -1.7 -1.1 -1.1 CheapCSCO CISCO SYSTEMS INC Information Technology RS-Rating Suspe2-Neutral 19.55 5/10/2006 21% -1.3 -2.1 -1.4 CheapDGX QUEST DIAGNOSTICS Health Care 1-Overweight 2-Neutral 51.96 4/21/2006 18% -1.1 -1.2 -1.3 CheapEW EDWARDS LIFESCIENCES CORP Health Care 0-Unrated 0-Unrated 43.31 4/21/2006 20% -2.0 -1.2 -1.0 CheapHC HANOVER COMPRESSOR CO Energy 2-Equal weight 1-Positive 16.16 2/15/2006 31% -1.6 -1.9 -1.1 CheapMNST MONSTER WORLDWIDE INC Industrials 0-Unrated 0-Unrated 46.96 4/26/2006 36% -1.2 -1.3 -1.3 CheapPLCM POLYCOM INC Information Technology 1-Overweight 2-Neutral 19.23 4/20/2006 34% -2.2 -2.3 -1.6 CheapSMTC SEMTECH CORP Information Technology 2-Equal weight 1-Positive 19.06 3/1/2006 34% -2.4 -1.9 -1.4 CheapUVN UNIVISION COMMUNICATIONS-A Consumer Discretionary 1-Overweight 3-Negative 34.40 3/2/2006 27% -1.1 -2.0 -1.6 CheapSource: Lehman Brothers, OptionMetrics, Bloomberg, FAMENote: Acquisition targets with very low volatility have been removed from this list. Stocks that appear as unrated are either not covered by Lehman Brothers fundamental analysts orare currently subject to research restrictions. Our universe includes stocks included in either the S&P 500 or the NDX. February 14, 2006 4
  5. 5. Equity Derivatives Strategy | Equity Volatility Snapshot Earnings Watch: Companies Reporting 2/14 – 2/24 We incorporate implied volatility information to ascertain the expected stock price reaction priced in by the options market for upcoming earnings announcements. Please see Options Strategy Monthly: th Low Volatility in the 7 Inning? (January 10, 2006) for further details. In Figure 7, we present this week’s edition of the Earnings Watch.Figure 7: Expected Absolute Stock Price Reactions to Upcoming Earnings Announcements Average Absolute Stock Price Average Stock Price Move Expected Implied 1-day Stock Ticker Name Price (1/23/06) Move Following Earnings Following Earnings Earnings Date Price Move Announcements AnnouncementsDE DEERE & CO 14-Feb-06 73.80 2.7% 4.7% -0.2%SIAL SIGMA-ALDRICH 14-Feb-06 64.87 0.9% 2.9% 0.7%AMAT APPLIED MATERIALS INC 15-Feb-06 19.86 3.1% 1.7% 0.4%BIIB BIOGEN IDEC INC 15-Feb-06 43.71 1.1% 2.0% 1.0%DTE DTE ENERGY COMPANY 15-Feb-06 42.23 0.5% 0.9% -0.4%FE FIRSTENERGY CORP 15-Feb-06 48.84 0.8% 0.9% 0.1%GENZ GENZYME CORP 15-Feb-06 67.54 2.2% 3.6% 1.2%HPQ HEWLETT-PACKARD CO 15-Feb-06 31.74 4.8% 5.3% 1.0%JNY JONES APPAREL GROUP INC 15-Feb-06 31.64 4.4% 3.6% -0.1%NTAP NETWORK APPLIANCE INC 15-Feb-06 31.43 5.2% 8.0% 3.2%ODP OFFICE DEPOT INC 15-Feb-06 32.94 3.1% 3.4% 1.2%PGN PROGRESS ENERGY INC 15-Feb-06 44.18 1.2% 0.8% -0.3%BHI BAKER HUGHES INC 16-Feb-06 69.26 1.0% 2.3% -0.2%DELL DELL INC 16-Feb-06 31.57 3.6% 4.8% 1.2%INTU INTUIT INC 16-Feb-06 53.08 2.8% 4.9% -1.6%JCP J.C. PENNEY CO INC 16-Feb-06 55.40 1.9% 2.9% 0.6%LTR LOEWS CORP 16-Feb-06 95.72 1.3% 1.6% 0.9%NVDA NVIDIA CORP 16-Feb-06 44.05 5.6% 10.4% 0.4%PLD PROLOGIS 16-Feb-06 50.75 0.8% 1.7% -0.2%TGT TARGET CORP 16-Feb-06 54.54 1.5% 2.0% 0.9%WPI WATSON PHARMACEUTICALS INC 16-Feb-06 32.12 3.2% 5.7% 0.4%CPB CAMPBELL SOUP CO 17-Feb-06 29.45 0.7% 2.7% 0.0%PCG P G & E CORP 17-Feb-06 36.75 0.8% 0.9% -0.3%RSH RADIOSHACK CORP 17-Feb-06 21.52 3.0% 4.4% -0.7%CCU CLEAR CHANNEL COMMUNICATIONS 21-Feb-06 28.66 1.0% 1.3% -0.6%GPC GENUINE PARTS CO 21-Feb-06 42.14 0.9% 2.9% 1.7%NOVL NOVELL INC 22-Feb-06 9.07 1.5% 6.0% -2.7%RRD RR DONNELLEY & SONS CO 22-Feb-06 31.75 1.0% 1.4% 0.4%S SPRINT NEXTEL CORP 22-Feb-06 22.96 1.4% 1.9% 0.3%SRE SEMPRA ENERGY 22-Feb-06 46.70 0.9% 1.3% 0.3%BLI BIG LOTS INC 23-Feb-06 13.22 1.7% 3.9% 3.2%CMS CMS ENERGY CORP 23-Feb-06 14.15 0.9% 1.9% -0.9%DCN DANA CORP 23-Feb-06 4.08 4.7% 2.4% 0.3%GPS GAP INC/THE 23-Feb-06 18.00 0.8% 2.0% -1.1%LTD LIMITED BRANDS INC 23-Feb-06 23.84 1.0% 2.1% -1.2%SWY SAFEWAY INC 23-Feb-06 22.44 0.1% 3.3% -0.5%AIG AMERICAN INTERNATIONAL GROUP 24-Feb-06 67.94 0.7% 1.9% 1.0%CZN CITIZENS COMMUNICATIONS CO 24-Feb-06 12.26 0.7% 1.1% -0.2%KSE KEYSPAN CORP 24-Feb-06 36.03 0.7% 1.1% -0.1%Source: Source: Lehman Brothers, BloombergNote: This list does not exclude illiquid options. Investors should consider liquidity of options before entering a trade. For details on the methodology we use to calculate the impliedstock price move, please see “Earnings Impact on Implied and Realized Volatility”, included in the Options Strategy Monthly, January 10, 2006. February 14, 2006 5
  6. 6. Equity Derivatives Strategy | Equity Volatility Snapshot Volatility Screen User Interface Obtain Implied Volatility Analytics for an Individual Stock Screen Universe for Rich/Cheap Volatility, By Sector, Analyst Rating, Earnings Period Implied and Realized Volatility Implied and Realized Rich/Cheap Indicators for for Individual Stock Screened Individual Stock ScreenedNote: Stocks that appear as unrated are either not covered by Lehman Brothers fundamental analysts or are currently subject to research restrictions. Volatility Screen Summary Output Number of Standard Deviations Above or Below Spreads’ 2-Year Average Current 1-Month If > 1 then “Rich”. If < -1 then “Cheap” Implied Volatility Rich/Cheap Metrics: Rich/Cheap Metrics: Company Details 1-Month 3-Month Implied Volatility Implied Volatility February 14, 2006 6
  7. 7. Equity Derivatives Strategy | Equity Volatility SnapshotAnalyst Certification:The respective research analysts responsible for the fundamental ratings hereby certify (1) that the views expressed in this research email accurately reflect ourpersonal views about any or all of the subject securities or issuers referred to in this email and (2) no part of our compensation was, is or will be directly or indirectlyrelated to the specific recommendations or views expressed in this email.I, Ryan Renicker, hereby certify (1) that the views expressed in this research email accurately reflect my personal views about any or all of the subject securities orissuers referred to in this email and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressedin this email.To the extent that any of the conclusions are based on a quantitative model, Lehman Brothers hereby certifies (1) that the views expressed in this research emailaccurately reflect the firms quantitative research model (2) no part of the firms compensation was, is or will be directly or indirectly related to the specificrecommendations or views expressed in this research report.Important DisclosuresLehman Brothers does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have aconflict of interest that could affect the objectivity of this email communication.Customers of Lehman Brothers in the United States can receive independent, third-party research on the company or companies covered in this report, at no cost tothem, where such research is available. Customers can access this independent research at www.lehmanlive.com or can call 1-800-2-LEHMAN to request a copy ofthis research.Investors should consider this communication as only a single factor in making their investment decision.The analysts responsible for preparing this report have received compensation based upon various factors including the Firm’s total revenues, a portion of which isgenerated by investment banking activities.Stock price and ratings history charts along with other important disclosures are available on our disclosure website at www.lehman.com/disclosuresAnd may also be obtained by sending a written request to: LEHMAN BROTHERS CONTROL ROOM , 745 SEVENTH AVENUE, 19TH FLOOR NEW YORK, NY10019Options are not suitable for all investors and the risks of option trading should be weighed against the potential rewards.Supporting documents that form the basis of the recommendations are available on request. Please note that the trade ideas withinthis report in no way relate to the fundamental ratings applied to European stocks by Lehman Brothers Equity Research.Guide to Lehman Brothers Equity Research Rating SystemOur coverage analysts use a relative rating system in which they rate stocks as 1-Overweight, 2- Equal weight or 3-Underweight (see definitions below) relative to othercompanies covered by the analyst or a team of analysts that are deemed to be in the same industry sector (“the sector coverage universe”). To see a list of companies thatcomprise a particular sector coverage universe, please go to www.lehman.com/disclosures.In addition to the stock rating, we provide sector views which rate the outlook for the sector coverage universe as 1-Positive, 2-Neutral or 3-Negative (see definitions below).A rating system using terms such as buy, hold and sell is not the equivalent of our rating system. Investors should carefully read the entire research report including thedefinitions of all ratings and not infer its contents from ratings alone.Stock Rating1-Overweight - The stock is expected to outperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon.2-Equal weight - The stock is expected to perform in line with the unweighted expected total return of the sector coverage universe over a 12-month investment horizon.3-Underweight - The stock is expected to underperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon.RS-Rating Suspended - The rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstancesincluding when Lehman Brothers is acting in an advisory capacity on a merger or strategic transaction involving the company.Sector View1-Positive - sector coverage universe fundamentals are improving.2-Neutral - sector coverage universe fundamentals are steady, neither improving nor deteriorating.3-Negative - sector coverage universe fundamentals are deteriorating. February 14, 2006 7
  8. 8. Equity Derivatives Strategy | Equity Volatility SnapshotDistribution of Ratings:Lehman Brothers Equity Research has 1859 companies under coverage.43% have been assigned a 1-Overweight rating which, for purposes of mandatory disclosures, is classified as a Buy rating, 35% of companies with this rating are investmentbanking clients of the Firm.40% have been assigned a 2-Equal weight rating which, for purposes of mandatory disclosures, is classified as a Hold rating, 6% of companies with this rating areinvestment banking clients of the Firm.17% have been assigned a 3-Underweight rating which, for purposes of mandatory disclosures, is classified as a Sell rating, 76% of companies with this rating areinvestment banking clients of the Firm.This material has been prepared and/or issued by Lehman Brothers Inc., member SIPC, and/or one of its affiliates (“Lehman Brothers”) and has been approved byLehman Brothers International (Europe), authorized and regulated by the Financial Services Authority, in connection with its distribution in the European EconomicArea. 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