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Utility Stocks: Implied Volatility and Short Interest Are Vital

PART:
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Part 2
Utility Stocks: Implied Volatility and Short Interest Are Vital PART 2 OF 3

Utility Stocks: Are Stocks with High Volatility Underperforming?

Utility stocks with high implied volatilities

NRG Energy (NRG) rose 33% in the trailing year as of March 17, 2017. It had the highest implied volatility of all the utility companies that make up the Utilities Select Sector SPDR ETF (XLU). In the past five days, NRG Energy rose 1.1%.

Utility Stocks: Are Stocks with High Volatility Underperforming?

Utility Stocks: Are Stocks with High Volatility Underperforming?

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The above chart shows the one-year and trailing-five-day returns of the stocks we identified in the previous part as having high and low implied volatilities. Usually, sharp movements in stocks cause their implied volatilities to rise. Stocks that fall, or those with anticipated downsides, tend to have higher implied volatilities. However, after the Fed hinted that it would raise interest rates at a slower pace than the market expected, the utilities sector outperformed due to strong, low volatility companies.

In the past five trading days, XLU rose 1.3%, while the S&P 500 Index (SPY) (QQQ) (SPX-INDEX) rose 0.2%. The Dow Jones Industrial Average (DIA) (DJIA-INDEX) rose 0.1% and the tech-heavy NASDAQ Composite (QQQ) (COMP-INDEX) rose 0.7% during this period.

Among the high implied volatility stocks, AES (AES) has risen the most in the last five days, while Exelon (EXC) has risen the least. However, AES  rose the least in the past year among our high implied volatility utility stocks. In last four quarters, its revenue rose 10.1% and its operating income fell 53.9%. Its operating profit margin is 16.7%.

NRG Energy (NRG) has risen the most in the past year among high implied volatility utilities. In the last four quarters, its revenue fell 10.8%, while its adjusted operating income fell 81.5%. Its operating profit margin is 9.8%.

Returns of utility stocks with low implied volatilities

Dominion Resources (D) rose the most in the last five days among low implied volatility utility stocks. In last four quarters, its revenue rose 20.7%, while its operating income rose 28.4%. Its operating profit margin is 31.5%.

In the next part of this series, we’ll look at the utility stocks with the highest short interest-to-equity float ratios. High short interest in a stock can cause its implied volatility to rise.

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