Investors in Parsley Energy, Inc. PE need to pay close attention to the stock based on moves in the options market lately. That is because the May 15, 2020 $7.50 Call had some of the highest implied volatility of all equity options today.
What is Implied Volatility
Implied volatility shows how much movement the market is expecting in the future. Options with high levels of implied volatility suggest that investors in the underlying stocks are expecting a big move in one direction or the other. It could also mean there is an event coming up soon that may cause a big rally or a huge sell-off. However, implied volatility is only one piece of the puzzle when putting together an options trading strategy.
What do the Analysts Think?
Clearly, options traders are pricing in a big move for Parsley Energy shares, but what is the fundamental picture for the company? Currently, Parsley Energy is a Zacks Rank #3 (Hold) in the Oil and Gas - Exploration and Production - United States industry that ranks in the Bottom 39% of our Zacks Industry Rank. Over the last 60 days, one analyst has increased its earnings estimate for the current quarter, while eight have dropped the estimate. The net effect has taken our Zacks Consensus Estimate for the current quarter from an earnings of 44 cents per share to an earnings of 26 cents in that period.
Given the way analysts feel about Parsley Energy right now, this huge implied volatility could mean there’s a trade developing. Oftentimes, options traders look for options with high levels of implied volatility to sell premium. This is a strategy many seasoned traders use because it captures decay. At expiration, the hope for these traders is that the underlying stock does not move as much as originally expected.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.