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Is Chesapeake Energy On the Verge of a Pullback?

CHK's back-month puts are popular

by 7/26/2012 2:05 PM
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Put volume is picking up steam on Chesapeake Energy Corporation (NYSE:CHK - 18.05) today, with some traders gambling on a journey into annual-low territory for the shares. In early afternoon action, the natural gas concern has seen roughly 63,000 puts cross the tape -- close to three times its average intraday put volume, and about twice the number of CHK calls exchanged.

Digging deeper, the out-of-the-money September 14 put has garnered the most attention, with more than 20,000 contracts traded on open interest of just 78, pointing to an influx of new positions. Plus, 87% of the puts have changed hands at the ask price, suggesting they were bought.

By purchasing the back-month puts to open, the traders are expecting CHK to breach the $14 level within the next couple of months -- which encompasses the company's earnings release next Monday, Aug. 6. Specifically, the volume-weighted average price of the puts is $0.59, meaning the buyers need CHK to fall beneath the $13.41 level -- just a hair's breadth from the stock's 52-week low of $13.32 -- in order to attain a profit.

However, pessimistic positions have become par for the course for CHK. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day put/call volume ratio of 0.87 ranks in the 72nd percentile of its annual range. In other words, options buyers have initiated bearish bets over bullish at a quicker-than-usual step during the past couple of weeks.

As a result, the security's Schaeffer's put/call open interest ratio (SOIR) of 1.36 indicates that puts outnumber calls among options slated to expire within three months. What's more, this ratio stands higher than 74% of all others of the past year, suggesting near-term options traders are more put-skewed than usual at the moment.

Meanwhile, that skepticism isn't confined to the options pits. Despite depleting by 8.3% during the past month, short interest still represents 14.3% of CHK's total available float. Plus, just 11 out of 27 analysts consider the security worthy of a "buy" or better rating.

At last check, CHK has followed the broader equities market into the black, tacking on 4.5% to trade near $18.05. From a longer-term perspective, the stock has surrendered about 47% over the past year, ushered lower beneath its 10-week and 32-week moving averages.


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