Investors in Centennial Resource Development CDEV need to pay close attention to the stock based on moves in the options market lately. That is because the Jul 15, 2022 $1 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 Centennial Resource shares, but what is the fundamental picture for the company? Currently, Centennial Resource is a Zacks Rank #3 (Hold) in the Oil and Gas - Exploration and Production - United States industry that ranks in the Top 5% of our Zacks Industry Rank. Over the last 30 days, no analysts have increased their earnings estimates for the current quarter, while two analysts have revised their estimates downward. The net effect has taken our Zacks Consensus Estimate for the current quarter from 48 cents per share to 42 cents in that period.
Given the way analysts feel about Centennial Resource 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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