Should Entercom Investors Worry About Implied Volatility?

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Entercom Communications shareholders may need to closely monitor the day-to-day stock price of this pure-play radio company that’s merging with CBS Radio, based on moves seen last week in the options market.


That’s the advice given by Zacks Equity Research ahead of the March 17 expiration of a $20 strike price that saw some of the highest implied volatility of all equity options.

Entercom head David Field

What is implied volatility? Simply stated, it shows the level of movement the market is expecting in the coming months. Options that have high levels of implied volatility could indicate that investors are expecting a big move — in one direction or the other.

It could also mean, Zacks notes, that there is an event coming up — in this case the final integration of CBS Radio’s AM and FM stations — that could result in a steep climb in price … or a huge sell off.

Zacks notes that it is important for investors to understand that implied volatility is only one piece of the puzzle when formulating an options trading strategy.

What do financial analysts queried by Zacks think?

“Clearly, options traders are pricing in a big move for Entercom Communications shares, but what is the fundamental picture for the company?” Zacks notes. “Currently, Entercom Communications is a “Hold” in the Broadcast Radio and Television industry.”

That ranks in the top 37% of its Zacks Industry Rank.

“Over the last 60 days, no analysts have increased their earnings estimates for the current quarter, while one has dropped the estimate,” Zacks says. “The net effect has taken our Zacks Consensus Estimate for the current quarter from 11 cents per share to 5 cents per share in that period.”

Given the way analysts feel about Entercom right now, Zacks concludes that “this huge implied volatility could mean there’s a trade developing.”

Why? “Oftentimes, options traders look for options with high levels of implied volatility to sell premium,” Zacks explains. “This is a strategy many seasoned traders use because it captures decay. At expiration, the hope for these traders is that the underlying stock does not move as much as originally expected.”

At 3:30pm Eastern Friday, ETM shares were off 1.7%, to $14.25. That’s down from $16.15 on Feb. 24. However, Entercom shares have remained above $14 a share since early November, and are still reflective of strong year-over-year growth, as ETM’s 52-week low is $10.25.