What is implied volatility?
Before we look at BP’s implied volatility, let’s quickly look at what volatility is. Volatility is a gauge of changes in stock returns in a period. If calculated based on historical stock prices, it is called historical volatility.
We can also estimate the future volatility of a security 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 thus provide larger positive or negative returns. But with a small implied volatility, the price movements would be expected to be smaller for a given period.
Expected price range for BP stock until June 29
Implied volatility in BP has risen by 5.1% since January 2, 2018, to the current level of 18.9%. In the same period, BP stock has declined by 7.6%. There appears to be a general inverse relationship between implied volatility and a stock’s price.
Considering BP’s implied volatility of 18.9% and assuming a normal distribution of prices (bell curve model) and a standard deviation of one (with a probability of 68.2%), BP’s stock price could close between $43.3 and $35.0 per share for the 116-day period ending June 29, 2018.
Implied volatility in peers
Similarly, implied volatility in ENI (E) has increased by 3.0% over January 2 to 22.4%. Also, implied volatilities in PetroChina (PTR) and YPF (YPF) have risen sharply by 9.8% and 18.1%, respectively, in the same period. PTR and YPF’s implied volatilities currently stand at 31.0% and 43.9%, respectively. In the stated period, E, PTR, and YPF stock prices have fallen by 1.3%, 4.6%, and 5.4%, respectively.
The SPDR Dow Jones Industrial Average ETF (DIA) and the SPDR S&P 500 ETF (SPY) have seen a rise in their implied volatilities by 7.3% and 5.7%, respectively, since January 2. But in the same period, DIA and SPY witnessed a rise in their values by 0.3% and 1.3%, respectively. DIA and SPY’s implied volatilities currently stand at 15.6% and 13.4%, respectively.
In the next part, we’ll look at Wall Street analysts’ estimate for BP’s dividend payment in the next quarter.