Reading BP’s Implied Volatility until August 18
What is implied volatility?
Volatility is a gauge of changes in a stock’s returns over a given period. If calculated based on historical stock prices, this is referred to as historical volatility.
When we estimate the future volatility of a security using an option pricing model, we’re estimating implied volatility. A high implied volatility would indicate that the stock price is expected to move sharply and provide larger positive or negative returns. But with low implied volatility, lower positive or negative returns can be expected for a given period.
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Implied volatility in BP and peers
The implied volatility in BP stock has fallen 2.8% since July 3, 2017, to its current level of 13.8%. During the same period, BP stock has risen 5.5%.
The implied volatility in Exxon Mobil (XOM) has fallen 3.1% since July 3 to 11.2%, while the implied volatilities in Chevron (CVX) and Royal Dutch Shell (RDS.A) have fallen 2.3% and 3.7%, respectively. CVX and Shell’s implied volatilities now stand at 14.1% and 13.9%, respectively, but their stock prices have risen 5.8% and 7.6%, respectively. XOM stock has fallen 1.0% during the same period.
The SPDR Dow Jones Industrial Average ETF (DIA) and the SPDR S&P 500 ETF’s (SPY) have seen their implied volatilities fall 1.0% and 1.5%, respectively, since July 3. DIA and SPY implied volatilities now stand at 7.3% and 8.5%, respectively, while their values have risen 3.5% and 2.3%, respectively.
Expected price range for BP stock
If we take BP’s implied volatility of 13.8% and assume a normal distribution of prices (bell curve model) and a standard deviation of one (with a probability of 68.2%), we see that BP’s stock price could close between $37.4 and $35.7 per share over the next ten calendar days (as of August 8).
In the next part, we’ll take a look at which institutions are buying or selling BP stock.