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Why Should Option Traders Look at These Upstream Stocks?

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High implied volatility                       

On December 9, 2016, Cobalt International Energy (CIE) had the highest implied volatility among the upstream stocks that are part of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP). Its implied volatility was ~145.7%. It’s ~6.9% above its 15-day average of 136.4%.

On December 7, 2016, Cobalt International Energy announced the completion of its debt exchange and financing transaction with certain holders.

High implied volatility in a stock indicates the market’s expectation of a large movement in prices. In the next part, we’ll analyze Cobalt International Energy’s price returns.

Below is a breakdown of the implied volatilities of other upstream stocks on December 9, 2016:

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  • California Resources (CRC) had an implied volatility of ~96.4%—1.5% above its 15-day average.
  • Denbury Resources (DNR) had an implied volatility of 80.2%—1.3% above its 15-day average.
  • Sanchez Energy (SN) had an implied volatility of ~74.6%—approximately 5.9% below its 15-day average.
  • Whiting Petroleum (WLL) had an implied volatility of ~67.1%—approximately 7.1% below its 15-day average.

Low implied volatility

On December 9, 2016, Occidental Petroleum (OXY) had the lowest implied volatility among upstream stocks at ~24.7%. It was ~0.8% below its 15-day average of ~24.9%.

Let’s look at some other upstream stocks with low implied volatilities on December 9, 2016:

  • EOG Resources (EOG) had an implied volatility of ~28.6%—4.8% below its 15-day average.
  • ConocoPhillips (COP) had an implied volatility of ~31.5%—4.6% below its 15-day average.
  • EQT (EQT) had an implied volatility of ~30.6%—approximately 0.1% below its 15-day average.
  • Cimarex Energy (XEC) had an implied volatility of ~34.7%—1.1% below its 15-day average.

A pattern emerges when we compare high implied volatility stocks to low implied volatility stocks. Most high volatility stocks are smaller upstream energy companies with weaker financial metrics. The stocks with lower volatilities are larger companies in a more solid financial situation.

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

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