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Why Utility Implied Volatility Matters

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Aug. 18 2020, Updated 5:26 a.m. ET

Implied volatility

Utilities are generally thought of as stocks with safe and stable movements. But for the past few years, their volatility has exceeded that of broader markets.

On August 9, 2017, Southern Company (SO) stock had an implied volatility of 11.6%, which is marginally lower than its 15-day average of 12.6%. Entergy (ETR) and FirstEnergy (FE) had implied volatilities of ~13% and ~17%, respectively, on the same day.

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Volatility coming back to normal

US utility stocks showed significantly higher implied volatilities in 2015, when the Fed started interest rate normalization. But in 2017, after a couple of hikes, utilities’ implied volatilities seemed to be back to normal at ~10%.

NRG Energy (NRG), the most volatile stock in the S&P 500 Utilities Index (XLU), showed an implied volatility of around 40% on August 9, 2017.

Remember, a fall in implied volatility is typically associated with an increase in the stock’s price, while a rise in implied volatility is typically associated with a decrease in the stock price. When implied volatility increases, it usually indicates investor anxiety.

In the next and final part of this series, we’ll assess the price targets of these three utility stocks.

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