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Is the Options Market Predicting a Spike in Western Midstream (WES) Stock?

·2 min read
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Investors in Western Midstream Partners, LP WES need to pay close attention to the stock based on moves in the options market lately. That is because the May 15, 2020 $5.00 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 Western Midstream shares, but what is the fundamental picture for the company? Currently, Western Midstream is a Zacks Rank #3 (Hold) in the Oil and Gas – Refining and Marketing – Master Limited Partnerships industry that ranks in the Top 32% of our Zacks Industry Rank. Over the last 30 days, no analysts have increased their earnings estimates for the current quarter, while one has revised the estimates downward. The net effect has taken our Zacks Consensus Estimate for the current quarter from 52 cents per share to 51 cents in that period.

Given the way analysts feel about Western Midstream right now, this huge implied volatility could mean there’s a trade developing. Often times, 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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