Believe what I say, not what I do…

July 26, 2004

Looking at Amazon’s (AMZN) stock chart for the past year, it would be hard to argue that the stock was less volatile. But that’s exactly what Amazon is telling its investors in its SEC filings. Because the volatility rate — an oft-ignored number buried deep in the stock option footnote — has fallen so dramatically over the past year, Amazon’s stock option expenses appear to be substantially lower than they would be had a higher volatility rate been used. The volatility rate is one of the numbers plugged into the Black-Scholes formula for valuing options and tinkering with the number — as many companies have been doing lately now that they’re required to disclose stock option expenses at the beginning of their footnotes — can have a big impact on option expenses. According to Amazon’s recent Q, the volatility rate fell to 57.7% during the second quarter compared with 76.3% a year earlier. I’ve looked back at a number of Amazon’s filings and the last time I found a volatility rate in the 50s was all the way back in 1997.

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