April 4, 2006                                    Equity Volatility Snapshot      Ryan Renicker, CFA            •     Macro...
Equity Derivatives Strategy | Equity Volatility Snapshot                                     Macro Overview: Value Outperf...
Equity Derivatives Strategy | Equity Volatility Snapshot                                                                  ...
Equity Derivatives Strategy | Equity Volatility Snapshot                            Weekly Roadmap (4/5 – 4/11)           ...
Equity Derivatives Strategy | Equity Volatility Snapshot                                  Volatility Screen               ...
Equity Derivatives Strategy | Equity Volatility Snapshot                                       Volatility Screen User Inte...
Equity Derivatives Strategy | Equity Volatility Snapshot                                   Earnings Watch: Companies Repor...
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 1805 c...
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Style-Oriented Option Investing - Value vs. Growth?

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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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Style-Oriented Option Investing - Value vs. Growth?

  1. 1. April 4, 2006 Equity Volatility Snapshot Ryan Renicker, CFA • Macro: Implied Volatility Trends By Style. Value stocks have continued to outperform growth 1.212.526.9425 stocks in 2006. We find that aggregate implied volatility for both styles have been on a similarryan.renicker@lehman.com downtrend and growth stocks’ implied volatilities tend to trade at a premium relative to value. Devapriya Mallick However, the average implied vs realized spread has been tighter for growth than value. 1.212.526.5429 dmallik@lehman.com • Sector Spotlight: Retailing. During the past year, the Retailing industry group has generally performed in line with the S&P 500. However, average implied volatility for Retailing stocks remains low relative to S&P 500 implied volatility. We believe investors should consider expressing directional views or going long volatility among names within the Retailing industry having particularly cheap options. • Weekly Roadmap. We provide a filtered list of expected events for the upcoming week to provide a roadmap for proactively constructing option trade ideas or preparing for events that could impact certain stocks having liquid options trading on them. • Volatility Screen. We update our Volatility Screen to identify stocks possibly having rich or cheap options. Investors can use this screen as a starting point to quickly identify options for efficient expression of directional views or long or short volatility positions. This interactive screen is updated on a daily basis and has other user-friendly features, such as a customized “download portfolio” capability. • Earnings Watch. We also update our Earnings Watch. This tool incorporates implied volatility information to estimate the expected stock price reaction the options market is pricing in for upcoming earnings announcements.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 8.
  2. 2. Equity Derivatives Strategy | Equity Volatility Snapshot Macro Overview: Value Outperforms Growth, yet Vols Trend Similarly Value stocks have been Within the large-cap universe, value stocks have recently outperformed growth stocks. The S&P outperforming growth 500/Citigroup Value index outperformed its growth counterpart by 1.03% in 2005 and 3.3% thisstocks in recent periods. year alone. In addition, we observe a similar relationship between the S&P pure style indexes; these indexes isolate stocks with more predominant growth and value characteristics. The S&P 500/Citigroup Pure Growth Index underperformed its value counterpart by 4.32% in 2005, and has risen 2.76% thus far in 2006 versus a 4.71% rise in the value Index. Growth stocks tend to Given these contrasting return patterns in the cash market, we compare aggregate implied volatilities trade at higher implied for the two style indexes to identify potential style investing biases in the options market. After analyzingvols than value stocks… the average implied volatility (weighted by market capitalization) for pure value and growth stocks, we found that there have been fewer relative value opportunities from an aggregate level volatility perspective, as they have both had similar downward trends in implied volatility (Figure 1). In terms of the absolute levels of volatility, we find that growth stocks tend to trade at an average premium of over 2 vol points relative to value stocks. This was observed on both an implied and realized basis. …however, the implied However, it is interesting to note that options on growth stocks have, on average, tended to trade at a vs realized spread is far tighter implied-realized spread relative to options on value stocks (Figure 2). For options on stocks in lower. the pure value index, implied volatility has traded at an average premium of about 1.4% over realized volatility year to date. On the other hand, volatility sellers in growth names have had an average premium of only 60 bps this year. In addition, there were even brief instances in March when implied volatility dipped below realized volatility. We believe this indicates the value style category tends to provide more opportunities for systematic volatility sellers owing to lower average realized volatility, even though implied volatility for value stocks trades lower than that of growth stocks.Figure 1: Growth Stocks Trade at Higher Average Implied Vols Figure 2: Options on Growth Stocks Trade at Tighter Spreads 24% 3.0% Implied vs Realized (Growth) 2.5% Implied vs Realized (Value) 23% 2.0% 22% 1.5% 21% 1.0% 20% 0.5% Wgt Avg Implied Vol (Growth Stocks) 19% 0.0% Wgt Avg Implied Vol (Value Stocks) 18% -0.5% ar ar ar ar ar ar ar ar b b n an an n n n an an an an eb eb eb eb eb eb Ja Ja Fe Fe a a M M -M -M -M -M -M -M -J -J -J -J -J -J -J -J -F -F -F -F -F -F 3- 7- 3- 7- 7- 7- 10 17 24 31 14 21 28 10 17 24 31 14 21 28 14 21 28 14 21 28Source: Lehman Brothers, OptionMetrics, Bloomberg Source: Lehman Brothers, OptionMetrics, Bloomberg April 4, 2006 2
  3. 3. Equity Derivatives Strategy | Equity Volatility Snapshot Sector Spotlight: Retail Complacency? During the past year, the Retailing industry group has generally performed in line with the S&P 500 Index (Figure 3). We believe this relatively strong correlation is likely driven by increasing investor focus on macroeconomic conditions (such as rising short-term rates and consumers’ disposable income) that are becoming more relevant performance and risk factors for both the SPX and industries having particularly high exposure to macro factors. One such industry is Retailing (particularly the mid-to-low end retail segment). From a volatility perspective, we believe the options market is currently pricing in very low risk expectations for retailers, which have declined since the beginning of this year. In fact, short-dated implied volatility for the Retailing industry remains near its one year low relative to that of the S&P 5001 (Figure 4). Given the relatively strong performance of the Retailing industry (particularly since calendar Q4), the host of macro-related factors that could impact consumer spending, the historical tendency of the industry to have a relatively high exposure to a flat/inverted yield curve scenario, and its cheap implied volatility levels, we believe investors should consider expressing directional views or going long volatility among names within the Retailing industry having particularly cheap options.Figure 3: S&P 500 and Retailing Performance Similar Figure 4: Retailing Implied Volatility Cheap Relative to S&P 500 115 18% S&P 500 Retailing Index S&P 500 17% 110 Retailing 3M - 66D Realized Vol 16% Performance (Scaled) 105 15% 14% 100 13% 12% 95 11% Retailing Implied Vol Relative to S&P 500 90 10% 5 5 05 5 05 05 5 5 5 06 06 6 r-0 -0 l-0 g- p- -0 -0 -0 -0 n- n- b- ar 5 05 05 06 ct 05 5 5 06 6 5 ay 05 05 ov ec l-0 Ju -0 -0 -0 -0 Ap Ju Au Se Ja Fe p- - n- n- b- g- r- O ov M ec ay ar ct M N D Ju Ju Ja Ap Se Fe Au O M N D MSource: Lehman Brothers, Bloomberg Source: Lehman Brothers, OptionMetrics, Bloomberg 1 We calculate the implied volatility for the retailing industry group by using the market-cap weighted average 3-month at- the-money implied volatility for the current constituents of the S&P 500 Retailing Industry Group. April 4, 2006 3
  4. 4. Equity Derivatives Strategy | Equity Volatility Snapshot Weekly Roadmap (4/5 – 4/11) In this section, we provide a filtered list of expected events for the upcoming week to provide a roadmap for constructing option trade ideas at the single-stock level. In a nutshell, our filter excludes events involving stocks that either do not have listed options or names having options that lack a reasonable level of liquidity. The current list of events we screen for include the following: Earnings Reports and Times Corporate Analyst Meetings Corporate Calls & Presentations Shareholder Meetings Brokerage Analyst Meetings Brokerage Analyst Calls Our universe includes S&P 500 and/or Nasdaq 100 constituents, and excludes stocks having prices below $5. Figure 5: Weekly Roadmap Closing Expected Ticker Company Event Price SPX? MID? NDX? Time (4/3/06) Expected Event Date: April 5 (Wed.) ADSK AUTODESK INC Analyst Meeting Before Open 37.25 Yes No Yes BBBY BED BATH & BEYOND INC Earnings Before Open 37.95 Yes No Yes MON MONSANTO CO Earnings Before Open 86.65 Yes No No APOL APOLLO GROUP INC-CL A Analyst Meeting After Close 51.55 Yes No Yes Expected Event Date: April 6 (Thurs.) Retail Same Store Sales - Before Open APOL APOLLO GROUP INC-CL A Analyst Meeting Intraday 51.55 Yes No Yes STZ CONSTELLATION BRANCS INC Earnings After Close 25.25 Yes No n RIMM RESEARCH IN MOTION Earnings After Close 85.45 No No Yes Expected Event Date: April 7 (Friday) Nonfarm Payrolls - Before Open ESRX EXPRESS SCRIPTS INC Analyst Meeting Intraday 87.63 Yes No Yes BHI BAKER HUGHES INC March 06 Intl. Rig Count Released Before Open 67.75 Yes No No Expected Event Date: April 8 (Sat.) None Expected Expected Event Date: April 9 (Sunday) None Expected Expected Event Date: April 10 (Monday) AA ALCOA INC Earnings N/A 30.90 Yes No No Expected Event Date: April 11 (Tuesday) RHAT RED HAT INC Analyst Meeting Before Open 27.91 No No Yes Source: Lehman Brothers, Thomson April 4, 2006 4
  5. 5. Equity Derivatives Strategy | Equity Volatility Snapshot 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 6, we present the current list of stocks having relatively rich options.Figure 6: 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)AVP AVON PRODUCTS INC Consumer Staples 3-Underweight 2-Neutral 30.74 4/28/2006 27% 1.5 1.0 1.1 RichBOL BAUSCH & LOMB INC Health Care 3-Underweight 1-Positive 61.25 4/28/2006 33% 1.8 3.3 2.8 RichCELG CELGENE CORP Health Care 2-Equal weight 2-Neutral 42.85 4/28/2006 49% 1.2 1.4 1.3 RichDBD DIEBOLD INC Information Technology 0-Unrated 0-Unrated 41.05 4/20/2006 25% 1.3 1.1 1.1 RichEQR EQUITY RESIDENTIAL Financials 2-Equal weight 2-Neutral 46.25 5/3/2006 21% 1.6 1.4 1.2 RichGM GENERAL MOTORS CORP Consumer Discretionary 2-Equal weight 3-Negative 20.14 4/19/2006 66% 1.2 1.7 1.6 RichGVA GRANITE CONSTRUCTION INC Industrials 0-Unrated 0-Unrated 49.71 4/27/2006 33% 1.5 1.4 1.2 RichHSY HERSHEY CO/THE Consumer Staples 2-Equal weight 3-Negative 52.00 4/21/2006 19% 1.2 1.3 1.4 RichLEA LEAR CORP Consumer Discretionary 3-Underweight 3-Negative 17.61 4/21/2006 68% 1.2 3.1 2.9 RichMO ALTRIA GROUP INC Consumer Staples 2-Equal weight 1-Positive 71.31 4/20/2006 29% 1.7 2.0 2.0 RichPCH POTLATCH CORP Materials 0-Unrated 0-Unrated 41.65 4/19/2006 36% 2.4 3.0 3.4 RichPOM PEPCO HOLDINGS INC Utilities 2-Equal weight 3-Negative 22.77 5/9/2006 20% 1.3 1.7 1.7 RichRE EVEREST RE GROUP LTD Financials 1-Overweight 1-Positive 93.80 4/18/2006 22% 1.8 1.6 1.4 RichSFG STANCORP FINANCIAL GROUP Financials 3-Underweight 2-Neutral 54.25 4/26/2006 23% 1.3 1.1 1.1 RichSMG SCOTTS MIRACLE-GRO CO-CL A Materials 0-Unrated 0-Unrated 45.64 4/28/2006 23% 1.1 1.4 1.8 RichSNV SYNOVUS FINANCIAL CORP Financials 3-Underweight 2-Neutral 27.13 4/26/2006 22% 1.4 2.5 2.6 RichSTI SUNTRUST BANKS INC Financials 3-Underweight 1-Positive 72.74 4/18/2006 17% 1.3 2.5 2.2 RichWABC WESTAMERICA BANCORPORATIOFinancials 2-Equal weight 2-Neutral 51.69 4/19/2006 19% 1.7 2.0 1.8 RichWMI WASTE MANAGEMENT INC Industrials 1-Overweight 1-Positive 35.58 4/27/2006 18% 1.3 1.4 1.9 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 7, we provide the current list of stocks having relatively cheap options.Figure 7: 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)AGE EDWARDS (A.G.) INC Financials 0-Unrated 0-Unrated 49.00 6/23/2006 19% -1.7 -1.3 -1.5 CheapAVT AVNET INC Information Technology 1-Overweight 2-Neutral 25.43 4/27/2006 28% -1.8 -1.6 -1.4 CheapBEAS BEA SYSTEMS INC Information Technology 1-Overweight 1-Positive 13.05 5/18/2006 32% -1.0 -1.4 -1.3 CheapCOL ROCKWELL COLLINS INC. Industrials 1-Overweight 1-Positive 55.44 4/27/2006 19% -2.1 -1.1 -1.1 CheapCTSH COGNIZANT TECH SOLUTIONS-A Information Technology 0-Unrated 0-Unrated 59.58 4/27/2006 30% -1.0 -2.0 -2.0 CheapFCS FAIRCHILD SEMICON INTERNATIOInformation Technology 1-Overweight 1-Positive 19.35 4/13/2006 35% -1.6 -1.4 -1.3 CheapGE GENERAL ELECTRIC CO Industrials 1-Overweight 1-Positive 34.69 4/13/2006 13% -1.7 -1.0 -1.0 CheapGT GOODYEAR TIRE & RUBBER CO Consumer Discretionary 0-Unrated 0-Unrated 14.28 5/4/2006 34% -2.2 -1.0 -1.0 CheapIDTI INTEGRATED DEVICE TECH INC Information Technology 1-Overweight 1-Positive 15.24 5/3/2006 33% -1.0 -2.3 -2.0 CheapJBL JABIL CIRCUIT INC Information Technology 0-Unrated 0-Unrated 42.75 6/21/2006 25% -1.6 -1.2 -1.1 CheapKMX CARMAX INC Consumer Discretionary 2-Equal weight 2-Neutral 31.96 6/20/2006 32% -1.4 -1.1 -1.2 CheapMCRL MICREL INC Information Technology 3-Underweight 1-Positive 15.24 4/28/2006 39% -1.6 -1.1 -1.0 CheapMIK MICHAELS STORES INC Consumer Discretionary 1-Overweight 2-Neutral 37.60 5/25/2006 21% -2.6 -3.7 -2.1 CheapMRBK MERCANTILE BANKSHARES CORPFinancials 1-Overweight 2-Neutral 38.31 4/26/2006 12% -1.4 -1.6 -1.5 CheapMWV MEADWESTVACO CORP Materials 1-Overweight 1-Positive 27.86 4/20/2006 15% -1.3 -2.4 -1.8 CheapORI OLD REPUBLIC INTL CORP Financials 0-Unrated 0-Unrated 22.00 4/28/2006 14% -1.3 -1.0 -1.0 CheapPLL PALL CORP Industrials 2-Equal weight 1-Positive 30.83 6/1/2006 19% -1.4 -2.2 -2.1 CheapPWR QUANTA SERVICES INC Industrials 0-Unrated 0-Unrated 16.03 5/5/2006 34% -1.3 -1.6 -1.7 CheapRIMM RESEARCH IN MOTION Information Technology 1-Overweight 2-Neutral 85.45 4/6/2006 41% -1.3 -1.6 -1.5 CheapTEK TEKTRONIX INC Information Technology 0-Unrated 0-Unrated 35.35 6/23/2006 24% -2.7 -1.1 -1.3 CheapUVN UNIVISION COMMUNICATIONS-A Consumer Discretionary 1-Overweight 3-Negative 34.54 5/4/2006 25% -1.3 -1.6 -1.6 CheapWIND WIND RIVER SYSTEMS INC Information Technology 0-Unrated 0-Unrated 12.22 5/25/2006 36% -2.0 -2.1 -1.9 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. April 4, 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 ScreenedSource: Lehman BrothersNote: 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 1-Month Implied Volatility 3-Month Implied Volatility Standard Deviations from Mean Standard Deviations from Mean Lehman Expected Current Current Lehman Implied vs Implied vs Implied vs Implied vs Implied vs Implied vs Ticker Name GICS Sector Company Price Earnings 1-Month 3-Month Sector View Realized Sector S&P 500 Realized Sector S&P Rating Date Implied ImpliedA AGILENT TECHNOLOGIES INC Information Technology 1-Overweight 2-Neutral 37.72 5/16/2006 21% 0.1 -1.9 -1.7 24% 0.2 -1.9 -1.6AA ALCOA INC Materials 1-Overweight 1-Positive 29.80 4/6/2006 28% 1.2 0.6 0.9 27% -0.5 0.0 0.6AAI AIRTRAN HOLDINGS INC Industrials 1-Overweight 1-Positive 18.21 4/26/2006 42% 0.6 -0.5 -0.7 43% -0.4 -0.8 -0.9AAP ADVANCE AUTO PARTS Consumer Discretionary 1-Overweight 1-Positive 41.28 5/18/2006 27% -0.1 0.6 0.4 29% 1.4 1.6 1.4AAPL APPLE COMPUTER INC Information Technology 2-Equal weight 2-Neutral 63.99 4/13/2006 44% 0.7 0.6 0.6 42% -0.8 0.2 0.1ABC AMERISOURCEBERGEN CORP Health Care 2-Equal weight 2-Neutral 47.34 4/21/2006 23% 0.3 0.8 0.1 21% 0.5 -0.5 -1.0ABI APPLIED BIOSYSTEMS GROUP-A Health Care 2-Equal weight 1-Positive 27.56 4/26/2006 24% 0.4 0.0 -0.5 24% 0.0 -0.4 -0.7ABK AMBAC FINANCIAL GROUP INC Financials 0-Unrated 0-Unrated 81.80 4/20/2006 18% 0.2 0.0 -0.4 18% 0.3 -0.3 -0.5ABS ALBERTSONS INC Consumer Staples RS-Rating Suspe2-Neutral 25.81 6/7/2006 12% 0.4 -1.9 -1.8 13% -2.8 -2.3 -2.0ABT ABBOTT LABORATORIES Health Care 0-Unrated 0-Unrated 44.25 4/12/2006 19% 0.5 1.6 0.7 19% -0.4 2.0 1.2ACE ACE LTD Financials 2-Equal weight 1-Positive 56.61 4/25/2006 19% -0.2 -1.0 -1.2 22% 0.1 -0.1 -0.4ACF AMERICREDIT CORP Financials 0-Unrated 0-Unrated 30.32 4/25/2006 24% -1.0 -1.0 -1.2 27% -0.5 -1.1 -1.2ACI ARCH COAL INC Energy 1-Overweight 1-Positive 69.78 4/25/2006 35% -0.6 -1.0 -0.1 37% 0.3 -1.1 0.2ACS AFFILIATED COMPUTER SVCS-A Information Technology 0-Unrated 0-Unrated 63.02 4/21/2006 20% 1.0 -1.7 -1.5 21% -2.3 -2.0 -1.6ACV ALBERTO-CULVER CO Consumer Staples 0-Unrated 0-Unrated 46.03 4/28/2006 19% 0.3 0.0 -0.3 19% 0.2 -0.3 -0.1ACXM ACXIOM CORP Information Technology 0-Unrated 0-Unrated 26.09 5/11/2006 27% 0.4 -0.2 -0.3 25% 0.0 -0.3 -0.5ADBE ADOBE SYSTEMS INC Information Technology 2-Equal weight 2-Neutral 36.55 3/22/2006 38% 1.6 1.9 2.3 34% -0.1 1.4 1.6ADCT ADC TELECOMMUNICATIONS INCInformation Technology 1-Overweight 2-Neutral 25.55 6/1/2006 38% -0.1 -1.4 -1.4 40% -0.2 -1.3 -1.2ADI ANALOG DEVICES Information Technology 1-Overweight 1-Positive 37.51 5/12/2006 28% 0.0 -0.7 -0.7 27% -0.1 -1.1 -0.8ADM ARCHER-DANIELS-MIDLAND CO Consumer Staples 0-Unrated 0-Unrated 35.00 4/28/2006 25% 0.0 0.7 0.5 28% -0.2 1.7 1.5 Rich/Cheap Metrics: Rich/Cheap Metrics: Company Details 1-Month 3-Month Implied Volatility Implied VolatilitySource: Lehman Brothers April 4, 2006 6
  7. 7. Equity Derivatives Strategy | Equity Volatility Snapshot Earnings Watch: Companies Reporting 4/5 – 4/11 We incorporate implied volatility information to estimate the expected stock price reaction priced in by the options market for upcoming earnings announcements. Please see Options Strategy Monthly: Low th Volatility in the 7 Inning? (January 10, 2006) for further details.Figure 8: 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 (3/27/06) Move Following Earnings Following Earnings Earnings Date Price Move Announcements AnnouncementsBBBY BED BATH & BEYOND INC 05-Apr-06 37.95 4.3% 4.7% 0.2%MON MONSANTO CO 05-Apr-06 86.65 3.5% 2.5% 0.0%STZ CONSTELLATION BRANDS INC-A 06-Apr-06 25.25 2.5% N/A N/AAA ALCOA INC 10-Apr-06 30.90 3.9% 3.0% -0.5%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. April 4, 2006 7
  8. 8. 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. April 4, 2006 8
  9. 9. Equity Derivatives Strategy | Equity Volatility SnapshotDistribution of Ratings:Lehman Brothers Equity Research has 1805 companies under coverage.43% have been assigned a 1-Overweight rating which, for purposes of mandatory disclosures, is classified as a Buy rating, 29% of companies with this rating are investmentbanking clients of the Firm.42% have been assigned a 2-Equal weight rating which, for purposes of mandatory disclosures, is classified as a Hold rating, 22% of companies with this rating areinvestment banking clients of the Firm.15% have been assigned a 3-Underweight rating which, for purposes of mandatory disclosures, is classified as a Sell rating, 13% 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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This document is for information purposes only and it should not be regarded as anoffer to sell or as a solicitation of an offer to buy the securities or other instruments mentioned in it. No part of this document may be reproduced in any mannerwithout the written permission of Lehman Brothers. With the exception of disclosures relating to Lehman Brothers, this research report is based on current publicinformation that Lehman Brothers considers reliable, but we make no representation that it is accurate or complete, and it should not be relied on as such. In the caseof any disclosure to the effect that Lehman Brothers Inc. or its affiliates beneficially own 1% or more of any class of common equity securities of the subject company,the computation of beneficial ownership of securities is based upon the methodology used to compute ownership under Section 13(d) of the United States SecuritiesExchange Act of 1934. 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