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Commodity concern Chesapeake Energy Corporation (NYSE:CHK - 16.99) is being targeted by aggressive options traders, with speculators either gambling on a significant short-term rally or hedging their bearish bets. So far today, the stock has seen roughly 65,000 calls cross the tape -- about nine times its average intraday call volume, and around eight times the number of CHK puts traded.
The majority of the action has centered around the deep out-of-the-money January 45 call, which has seen nearly 51,000 contracts change hands. All of the calls crossed at the ask price, and implied volatility was last seen 17.5 percentage points higher, hinting at buy-to-open activity.
Since the calls are so far out of the money, they traded at a volume-weighted average price of just a penny. Assuming the call buyers are "vanilla," they'll profit if CHK topples the $45.01 level (strike plus average premium paid) -- implying expected upside of about 165% -- within the next few weeks. However, assuming the call buyers are short sellers, the options lock in an acceptable price at which to buy back the shares, should CHK skyrocket in the next month.
Speaking of short sellers, CHK is no stranger to these pessimists. Short interest jumped 16.1% during the most recent reporting period, and now accounts for 14.5% of the stock's total available float. In fact, at the equity's average pace of trading, it would take more than seven sessions to buy back all of these bearish bets.
Underscoring our theory of hedging activity, speculators on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open more than two CHK calls for every put during the past couple of weeks. What's more, the stock's 10-day call/put volume ratio of 2.20 ranks in the 78th percentile of its annual range, pointing to a much healthier-than-usual appetite for long calls of late.
At last check, CHK has fallen in step with the broader equities market, shedding 1.9% to hover just shy of $17. From a longer-term perspective, the stock has spent the past couple of months dawdling between support at $16.50 and resistance in the $17.50-$18 region -- home to its descending 10-week moving average.