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Implied Volatility of Top 5 Upstream Stocks: What Can We Gauge?

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Implied volatility

On October 4, 2017, ConocoPhillips (COP), Devon Energy (DVN), Occidental Petroleum (OXY), Anadarko Petroleum (APC), and EOG Resources (EOG) had implied volatilities of ~22.4%, ~31.0%, ~20.0%, 30.1%, and 22.3%, respectively. These upstream stocks fall into the top-five category when scaled by revenues.

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Forecasting stock price ranges using implied volatility

Based on their respective implied volatilities and assuming a normal distribution of stock prices with a standard deviation of one and a probability of 68.2%, our top five upstream stocks will likely close in the following ranges during the next 30 days:

  • ConocoPhillips (COP): $46.08–$52.40
  • Devon Energy (DVN): $33.27–$39.79
  • Occidental Petroleum (OXY): $60.32–$67.64
  • Anadarko Petroleum (APC): $45.02–$53.52
  • EOG Resources (EOG): $90.17–$102.51

Implied volatility is an options-model-based estimate of a stock’s future volatility. While it allows us to arrive at a theoretical estimate of a stock’s potential moves, the direction can’t be forecast. In a bullish market, implied volatility is likely to fall, while in a bearish market, implied volatility is likely to rise.

As we can see in the above chart, DVN has the highest implied volatility among its peers, while OXY has the lowest.

A higher implied volatility means less expected stability in a stock. It also means that investors expect the stock to move significantly in either direction, meaning a higher implied risk.

In the next and final part of this series, we’ll look at short interest trends for these companies for the next 12 months.

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