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Estimating BP’s Stock Price Using Implied Volatility

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What is implied volatility?

Volatility gauges changes in a stock’s return over a period. When estimated based on historical stock prices, it is called historical volatility.

We can estimate the future volatility, or implied volatility, of security using an option pricing model. A high implied volatility would indicate that a stock price is expected to move sharply, thereby providing higher positive or negative returns. Contrarily, with low implied volatility, lower positive or negative returns can be expected.

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Comparing BP’s implied volatility

BP’s implied volatility rose from 17.3% on April 6, 2017, to 19.3% on July 6, 2017. During the same period, BP stock fell 0.4%. Similarly, Royal Dutch Shell’s (RDS.A) implied volatility rose 5.6% to 22.0%, and ExxonMobil’s (XOM) and Chevron’s (CVX) implied volatility rose 3.1% and 2.5%, respectively, to 16.2% and 18.3% on July 6. Royal Dutch Shell’s and Chevron’s stock prices rose 0.9% and 0.2%, respectively, whereas ExxonMobil stock fell 2.9%.

The SPDR Dow Jones Industrial Average ETF’s (DIA) and the SPDR S&P 500 ETF’s (SPY) implied volatility rose 1.3% and 0.8%, respectively, to 9.3% and 9.9% on July 6. During the same period, DIA and SPY each rose 3%.

Expected price range for BP stock

Considering BP’s implied volatility of 19.3% and assuming a normal distribution of prices, a standard deviation of one, and a probability of 68.2%, BP stock price could close between $35.40 and $33.50 per share in the next eight calendar days. In the next part, we’ll review which institutions are buying or selling BP stock.

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