Devon Energy Corp. (DVN), Trending Stock Report

Devon Energy Corp. (DVN) appeared on our list of compressed stocks this morning. DVN is a natural gas energy company that has a long history of making big moves after a compression signal.

From an options trader’s perspective, the volatility expectations for the October 18^th expiration are extremely low (see page 3) for a time when seasonal market volatility tends to be higher than normal. This could be great news for our favorite neutral option buying strategy that profits from increasing volatility.

This Volatility Term Structure for DVN shows us the implied volatility of the at-the-money options for the October 18^th expiration are extremely low relative to all other expirations. To learn more about Volatility Term Structure, click here. While there is an earnings announcement expected on August 6^th that could be a potential catalyst for a big move, earnings reports may not be as important as news about fuel demand.

This MDM graph compares the modeled expectations of current options prices (the orange line) to the actual movement of DVN’s stock price over the past 2 years. You can see that the actual behavior (the blue histogram) shows us that DVN made big moves more frequently than the modeled options prices expect. This is good news for option buyers.

This Volatility Cone shows us that the volatility expectations (the yellow dots) are all below the 2-year historical volatility average. To learn more about the Volatility Cone, click here. This confirms that DVN options are all relatively inexpensive. Options expiring in October are the first period where volatility expectations are closer to the extremely low historical volatility (the lower purple line) than they are to the 2-year average.

DVN’s stock price is compressed and volatility expectations for October 18^th are unusually low. This expiration falls into a time period where market volatility tends to be higher than normal. Natural gas prices do not have to follow the rest of the market. But if weather forecasts leading into expiration predict unusually high or low fuel demand for the winter, DVN could make a huge move that investors are not currently expecting. This is good news for our favorite neutral options strategy.

To get the details on today’s trade, be sure to read today’s ODDS Online Daily Option Trade Idea.