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Chesapeake Energy Traders Bet on a Breakout Above Resistance

Option bulls are circling around CHK's front-month options today

by 1/30/2013 12:20 PM
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Chesapeake Energy Corporation (NYSE:CHK - 19.97) is up more than 5% in today's trading, and option traders are betting on this positive price action to continue. Roughly 115,000 calls have crossed the tape so far, or nearly nine times the average intraday volume. Near-term speculators are honing in on CHK's front-month series of options, and are scooping up the stock's February 21 and 22 calls.

Roughly 10,000 contracts have traded at CHK's February 21 call at last check. A number of these have crossed at the ask price, and implied volatility was last seen 6.2 percentage points higher, indicating that a portion of today's volume is of the buy-to-open variety. By purchasing these out-of-the-money calls for a volume-weighted average price (VWAP) of $0.50, traders will begin to profit with each step north of breakeven at $21.50 (strike plus VWAP) the stock takes by the close on Friday, Feb. 15, when front-month options expire. This represents a 7.7% premium to the equity's current perch.

Meanwhile, a healthy portion of the approximately 7,500 February 22 calls that have changed hands so far have gone off at the ask price, and only 671 contracts currently make up open interest at this strike, pointing to buyer-driven volume. With the VWAP for these further out-of-the-money calls at $0.22, breakeven is $22.22, meaning CHK needs to rise 11.3% over the next two weeks in order for these bets to be profitable.

Widening the scope reveals that bullish bets have been in favor on CHK in recent months. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 50-day call/put volume ratio of 1.52 ranks higher than 72% of other such readings taken in the past year. In other words, calls have been bought to open over puts at a faster-than-usual clip during the last 10 weeks.

On the charts, CHK has gotten off to an outstanding start in 2013, with the shares up more than 20% since the beginning of the year. Additionally, the equity has gained ground in today's session on news that CEO Aubrey K. McClendon will be stepping down, effective April 1. However, the stock is facing a formidable technical foe at the round-number $20 mark, which has not allowed a daily close above it since Nov. 1.

What's more, the February 20 strike is home to peak call open interest in the front-month series of options. This heavy accumulation of calls could create a layer of options-related resistance in the near term, as the roughly 14,500 contracts that reside here begin to unwind over the next two weeks.


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