One victim of the “gut-wrenching” volatility in equity markets has been IPOs, said a recent article in The Wall Street Journal: “With the VIXor ‘fear index,’ hitting extremely high levels of late . . . It is clear investors can’t decide what companies are really worth.”
“So how are poor valuation practitioners supposed to determine the ‘right’ DLOM for a company they are valuing?” asks Ron Seaman (Southland Business Group). “With VIX levels going from the teens to the 40s and back within weeks, what volatility number should they use? Since higher volatility numbers will produce bigger discounts, how can they justify the number? And does the selected number really apply to the subject company or just to the total market?”
One possible solution: Seaman’s study on LEAPS (Long Term Equity Anticipation Securities) avoids the volatility dilemma altogether. “LEAPS put options for the companies (or ETFs) that you choose already contain the market’s volatility estimates for those specific companies, not just for the market as a whole,” Seaman says, who also wrote, “The Effects of Current Economic Troubles on Discounts for Lack of Marketability,” for BVUpdate.
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