What is implied volatility?
In this part, let’s take a quick look at volatility. Volatility is a gauge of how much the stock return changes. When calculated based on historical stock prices, this measure is called historical volatility.
We can also estimate the expected future volatility of a security using an option pricing model, which is called implied volatility. High implied volatility could indicate that the stock price is expected to move more sharply, providing higher positive or negative returns. Conversely, when the implied volatility is low, lower positive or negative returns can be expected for a given period.
Implied volatility in Tesoro
Implied volatility in Tesoro fell from 28.1% on April 3, 2017, to 23.9% on June 21. Similarly, implied volatility in Marathon Petroleum (MPC), Valero Energy (VLO), and Phillips 66 (PSX) fell 2.6%, 3.1%, and 1.6%, respectively, in the same period. Currently, MPC, VLO, and PSX have implied volatility readings of 25%, 21%, and 17%, respectively.
The SPDR Dow Jones Industrial Average ETF (DIA) and the SPDR S&P 500 ETF’s (SPY), the broader market indicators, have also seen a decline in their implied volatilities by 0.9% and 1.9%, respectively, from April 3 to June 21.
DIA’s and SPY’s implied volatilities currently stand at 8.6% and 9.4%, respectively. During the same period, from April 3 to June 21, DIA and SPY witnessed 4% and 3% increases in their values, respectively. MPC and PSX stock rose 4% and 1%, respectively, but VLO fell 2% in the stated period.
Expected price range for Tesoro stock for the nine-day period ending June 30
Considering TSO’s implied volatility of 23.9% and assuming a normal distribution of prices and a standard deviation of 1 (with a probability of 68.2%), Tesoro stock could close between $87.70–$94.60 per share in the next nine calendar days.
In the next part, we’ll review the analyst ratings for Tesoro.