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Chesapeake Energy Corporation (NYSE:CHK) has had a put imbalance for the majority of 2013, and that trend continued on Friday, when over 35,000 puts traded, compared to roughly 21,000 calls. History is repeating itself again today -- with over 30,000 puts changing hands, compared to about 17,000 calls -- in spite of the fact that the stock touched a 52-week high of $26.63 earlier this morning, and is hovering just below it at $26.51.
Many of the puts at this morning's most actively traded strike may have been purchased as a way for CHK shareholders to lock in gains via a protective put strategy. Specifically, approximately 17,400 contracts have crossed the tape at CHK's out-of-the-money September 26 put, including two near-1,000-block sweeps (according to Trade-Alert). Volume has surpassed current open interest levels, and implied volatility is up 4.1 percentage points, suggesting opening activity. Also, data from the International Securities Exchange (ISE) confirms that some customers are buying these front-month puts to open.
Given that a healthy chunk of the contracts traded at the bid price, though, some of the out-of-the-money options may have been sold to open. In order for these speculators to profit, they need the shares of Chesapeake Energy to remain above the strike price through front-month options expiration. If the underlying does so, the traders will pocket the $0.68 volume-weighted average price (VWAP) received for the puts. However, if the stock takes a dive, the risk of assignment looms -- this means the put writers would need to purchase 100 shares per contract at the strike price, no matter how cheap the stock is priced at the time.
On the charts, Chesapeake Energy Corporation (NYSE:CHK) is up nearly 60% in 2013. Additionally, the gas and oil producer has outpaced the broader S&P 500 Index (SPX) by 24.3 percentage points through the previous 40 sessions, largely due to a stronger-than-expected showing in the earnings confessional to start the month. In fact, these solid technicals (combined with lingering pessimism) recently prompted my colleague Terri Stridsberg to take a bullish look at the shares.