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Upstream Stocks: What Do Investors Need to Know?

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Upstream Stocks: What Do Investors Need to Know? PART 1 OF 3

Where Are Option Traders Betting in Upstream Stocks?

High implied volatility upstream stocks

On February 3, 2017, Cobalt International Energy (CIE) had the highest implied volatility among the upstream stocks that make up the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).

Where Are Option Traders Betting in Upstream Stocks?

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Cobalt International Energy’s implied volatility was 92.8% on February 3—about 22.3% less than its 15-day average. High implied volatility in a stock indicates the market’s expectation of large movements in its price. In the next part, we’ll analyze Cobalt International Energy’s price returns.

Let’s take a look other upstream stocks with high implied volatilities on February 3, 2017:

  • California Resources (CRC) had an implied volatility of ~73.2%, 6.4% below its 15-day average.
  • Denbury Resources (DNR) had an implied volatility of 67.1%, 3.5% below its 15-day average.
  • Sanchez Energy (SN) had an implied volatility of ~59.1%, ~8.5% below its 15-day average.
  • SM Energy (SM) had an implied volatility of ~56.4%, ~2.8% above its 15-day average.

The rise in SM Energy’s implied volatility compared to its 15-day average is the largest among the five upstream stocks with the highest implied volatilities.

On January 31, 2017, SM Energy’s implied volatility rose 7%. On the same day, the stock fell 8.2%. On January 31, 2017, the company announced that the total estimated production for 2016 was about 55.3 million barrels of oil equivalent per day. It was nearly the same as previous expectations. SM Energy will release its 4Q16 earnings results on February 22, 2017.

Low implied volatility upstream stocks

On February 3, 2017, Occidental Petroleum (OXY) had the lowest implied volatility among upstream stocks that are part of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) at ~20.6%. The implied volatility was 1.7% below its 15-day average.

Let’s look at some other upstream stocks with low implied volatilities on February 3, 2017:

A pattern emerges when we compare high implied volatility stocks with low implied volatility stocks. Most high volatility stocks are small upstream energy companies with weak financial metrics. Stocks with lower volatilities tend to be large companies in more solid financial situations.

In the next part of this series, we’ll look at the returns of these upstream stocks.

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