What is implied volatility?
Before we examine implied volatility, let’s take a quick look at the basics of volatility. Volatility measures how much a stock return changes over a specific timeframe. When calculated based on historical stock prices, this metric is called historical volatility.
We can also estimate a stock’s future volatility of security using an option pricing model. This model is called implied volatility. High implied volatility would indicate that the stock price is expected to move sharply and provide higher positive or negative returns. With low implied volatility, lower positive or negative returns can be expected for a given period.
Implied volatility in Chevron and its peers
Implied volatility in Chevron (CVX) has risen from 15.4% on April 3, 2017, to 16.7% on June 23, 2017. During the same period, Chevron stock fell 2.2%.
Similarly, implied volatility in BP (BP) has risen 2.4% over April 3, 2017, to 17.7%. However, implied volatility in ExxonMobil (XOM) and Royal Dutch Shell (RDS.A) fell 1.0% and 0.4%, respectively, during the same period.
Currently, XOM and RDS.A have implied volatility readings of 13.9% and 17.5%, respectively. XOM and Shell stock fell 0.5% and 0.2%, respectively, but BP stock rose 2% during the same period.
The SPDR Dow Jones Industrial Average ETF (DIA) and the SPDR S&P 500 ETF (SPY), the broader market indicators, have also seen declines in their implied volatilities of 1.8% and 2.2%, respectively, from April 3 to June 23.
DIA and SPY have implied volatility readings of 7.8% and 8.5%, respectively. From April 3 to June 23, 2017, DIA and SPY saw rising values of 4% and 3%, respectively.
Expected price range for Chevron stock
Considering CVX’s implied volatility of 16.7% and assuming a normal distribution of prices and a standard deviation of 1 (with a probability of 68.2%), Chevron stock could see a closing price of $102.60–$107.40 per share in the seven-day period ending June 30, 2017.
In the next part, we’ll review the analysts’ ratings for Chevron.