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On Wednesday morning, Chesapeake Energy Corporation (NYSE:CHK) announced the sale of its Eagle Ford and Haynesville shale assets in order to get its budget in line. The move was dubbed "modest" by analysts at UBS, as well as "underwhelming" by those at Sterne Agee.
Apparently, the opinion among option traders was similarly tepid on Wednesday, as CHK saw a flurry of trading activity that looked to capitalize on short-term downside for the gas and oil name. In particular, the weekly 7/5 20.50- and 21-strike puts were targeted, with 2,850 and 1,415 contracts changing hands, respectively, at the two strikes.
A majority of the trades went off at the ask price, and open interest shot up between Wednesday's session and today, collectively indicating buy-to-open activity. Therefore, in order for the bears to profit, they need the shares of Chesapeake Energy to finish beneath the aforementioned strikes by today's closing bell. If they don't, however, the most the buyers can lose is the premium paid at initiation. At present, CHK is perched at $21.06.
Short-term pessimism is high on Chesapeake Energy. The stock features a Schaeffer's put/call open interest ratio (SOIR) of 1.35, with put open interest outstripping call open interest on options expiring in the front three months. The SOIR ranks in the 70th percentile of its annual range, confirming a prevailing bias toward puts over calls.
Short interest is on the rise, as well. In the past two reporting periods, short interest increased over 10%, and now makes up 12.5% of the equity's total float. At CHK's average daily trading volume, it would take nearly six sessions to buy back the shorted shares.
Technically, however, Chesapeake Energy Corporation (NYSE:CHK) is an outperformer. The stock boasts a year-to-date advance of 26.9%, and in the past two months, has outperformed the broader S&P 500 Index (SPX) by close to 11 percentage points. An unwinding of pessimism in the face of technical strength could prove a contrarian boon to the shares.