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Analyzing Utility Stocks’ Implied Volatilities

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Utility stocks with high implied volatilities

On January 5, 2017, NRG Energy (NRG) had the highest implied volatility among the utility companies that make up the Utilities Select Sector SPDR ETF (XLU).

NRG Energy’s implied volatility was 39.3% on January 5. Its 15-day average implied volatility was 41.3%. Its current volatility is 5.1% lower than its 15-day average. Wall Street analysts expect NRG Energy to report a loss of $0.17 per share in 4Q16. It could be fueling high implied volatility in the stock.

Let’s take a look at the implied volatilities of other utility stocks on January 5, 2017:

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  • AES’s (AES) implied volatility was 24.8%—about 5.4% lower than its 15-day average.
  • FirstEnergy’s (FE) implied volatility was 22.5%—1.1% more than its 15-day average.
  • Exelon’s (EXC) implied volatility was 21.7%—3.5% lower than its 15-day average.
  • NiSource’s (NI) implied volatility was 20.3%—9.9% more than its 15-day average.

The rise in NiSource’s implied volatility compared to its 15-day average is the largest among the five utility stocks with the highest implied volatilities. Its implied volatility rose 11.9% on January 5, 2017. On the same day, the stock rose 1.4%. On December 15, Goldman Sachs initiated coverage on NiSource with a “neutral” recommendation and target price of $23.

Utility stocks with low implied volatilities

On January 5, Southern Company (SO) had the lowest implied volatility of all the utility companies that make up XLU. Its implied volatility was 15.5%. Its 15-day average implied volatility was 15.8%. Its current implied volatility is 1.8% lower than its 15-day average.

Let’s look at the other utility stocks with low implied volatilities on January 5:

  • Xcel Energy’s (XEL) implied volatility was 16.6%—3.9% lower than its 15-day average.
  • Dominion Resources’ (D) implied volatility was 16.6%—2.8% more than its 15-day average.
  • WEC Energy Group’s (WEC) implied volatility was 16.9%—4.9% lower than its 15-day average.
  • Duke Energy’s (DUK) implied volatility was 17%—2.8% more than its 15-day average.

Remember, large movements or expectations of large movements in stocks’ prices can cause their implied volatilities to rise. In the next part, we’ll discuss the returns of the above stocks.

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