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Chesapeake Energy Corporation (CHK) Bears Bet on a Post-Earnings Drop

Speculators target CHK's weekly puts ahead of earnings

by 2/20/2013 11:15 AM
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Ahead of tomorrow morning's quarterly earnings report, Chesapeake Energy Corporation (NYSE:CHK - 20.52) has tacked on about 0.8% today, after an internal probe cleared outgoing CEO Aubrey McClendon of intentional financial misconduct. Nevertheless, bearish options activity is running hotter than usual on the stock, with roughly 21,000 puts changing hands so far. This is more than double the norm, and almost four times the number of calls traded.

Snagging the lion's share of the attention is the weekly 2/22 20-strike put, which has seen close to 5,400 contracts exchanged -- 91% of them at the ask price, suggesting they were purchased. More specifically, these puts crossed at a volume-weighted average price (VWAP) of $0.40. Meanwhile, today's volume has surpassed present open interest levels, and implied volatility was last seen almost 32 percentage points higher -- both indications of buy-to-open activity. Essentially, traders are counting on CHK to retreat below $19.60 (strike price less the VWAP) by the close this Friday, which is when these weekly options expire. This reflects a 4.5% drop from current levels.

This surge in put activity is more of the same for the gas and oil concern. Data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows a 10-day put/call volume ratio of 1.38 for CHK, indicating traders have bought to open 138 puts for every 100 calls during the past couple of weeks. This ratio arrives in the 87th percentile of its annual range, meaning speculators have picked up bearish bets over bullish at a faster pace just 13% of the time during the last 12 months.

From a technical perspective, CHK has climbed more than 23% year-to-date, and has outperformed the broader S&P 500 Index (SPX) by north of 9 percentage points over the past 40 sessions. Also of note, the shares have recovered nearly 26% since touching a late-December low of $16.37.

As previously mentioned, however, CHK is due to report fourth-quarter earnings ahead of tomorrow's open, and has fallen short of consensus bottom-line estimates in each of the past four quarters. If the company manages to disappoint analysts yet again, it could pressure the shares lower -- which would be good news for today's short-term bears.


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