Volatility is a gauge of changes in stock return during a specific period. When calculated based on historical stock prices, it is called historical volatility.
We can also estimate the future volatility of a stock using an option pricing model, which is called implied volatility. A large implied volatility would mean that the stock price is expected to move sharply and provide greater positive or negative returns. With small implied volatility, lower positive or negative returns can be expected for a given period.
Implied volatility in BP and peers
Implied volatility in BP has fallen 4.9% over July 3, 2017, to the current level of 11.7%. In the same period, BP stock has increased 9.1%.
Similarly, implied volatility in Statoil (STO) has fallen 4.3% over July 3 to 19.4%. Implied volatility in Petrobras (PBR) and ENI (E) fell 6.9% and 4.5%, respectively, in the same period. Petrobras and ENIs have implied volatility levels of 32.6% and 14.6%, respectively.
In the stated period, ENI stock price has risen 9.7%. However, STO and PBR stock have risen 21.0% and 29.4%, respectively.
The SPDR Dow Jones Industrial Average ETF (DIA) and the SPDR S&P 500 ETF’s (SPY) have also seen a fall in their implied volatilities of 1.2% and 1.5%, respectively, since July 3. DIA and SPY implied volatilities currently stand at 7.1% and 8.4%, respectively. During the same period, DIA and SPY witnessed a rise in these values if 4.7% and 3.2%, respectively.
Expected price range for BP stock until December 31
Considering BP’s implied volatility of 11.7% and assuming a normal distribution of prices, a standard deviation of 1, and a probability of 68.2%, BP’s stock price could close between $35.50–$40.10 per share for the 100-day period ending December 31, 2017.
In the next part, we’ll review the institutions that are buying or selling BP stock.