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Option Idea of the Week: Chesapeake Energy Corporation (CHK)

Why CHK could have more fuel in its technical tank

by 8/23/2013 10:36 AM
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Chesapeake Energy Corporation (NYSE:CHK) has had a stellar run on the charts lately, advancing more than 55% year-to-date, and outpacing the broader S&P 500 Index (SPX) by close to 21 percentage points over the most recent two-month time frame. What's more, the shares tagged a fresh annual high of $25.99 today, just a few weeks after enjoying an earnings-induced bullish gap on Aug. 1. Meanwhile, last week's short-lived pullback was contained by its 20-day moving average, which has acted as a floor since early July. This trendline also coincides with the recently supportive $24.60 region. Although the firm has endured some fundamental struggles of late, the stock's upward trajectory remains intact -- setting CHK up for a potentially profitable bullish play.

Daily Chart of CHK since June 2013 With 20-Day Moving Average

Despite the equity's technical fortitude, skepticism abounds on the gas and oil concern. In fact, traders on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open 31,549 puts during the past two weeks, compared to just 12,738 calls. The resultant 10-day put/call volume ratio of 2.48 -- up from a reading of just 0.42 on Aug. 2 -- stands at a 12-month peak, confirming speculators have been snapping up puts over calls at an annual-high clip. This bevy of bearish bets -- particularly at the underfoot September 25 strike, which holds open interest of more than 14,100 contracts -- could end up translating into options-related support in the near term.

Elsewhere, short interest climbed by 6.2% over the most recent reporting period, and now these pessimistic plays represent a lofty 12.2% of CHK's available float, bringing the number of shares sold short to 72.6 million. It would take nearly nine sessions to cover these shorted shares, at the stock's average daily trading volume -- denoting a significant amount of available sideline cash. From a contrarian perspective, this puts the security in a prime position to benefit from future short-covering activity, should CHK continue to climb higher.

Also of note, the majority of covering analysts are less than enthusiastic about the security's prospects. CHK maintains just seven "buy" or better ratings, versus 18 tepid "hold" suggestions. In fact, Susquehanna lowered its rating on the stock just two days ago. Moreover, the equity's average 12-month price target of $24.66 reflects a discount to CHK's current price of $25.82. In other words, a wave of upgrades and/or price-target hikes could serve as a tailwind for the shares.

Speculators hoping to wager on extended gains for Chesapeake Energy Corporation (NYSE:CHK) may want to consider buying the security's in-the-money November 22-strike calls, which are asked at $4.25. It should be noted that the firm is tentatively on tap to report quarterly earnings between Oct. 28 and Nov. 1. As such, more cautious traders may wish to employ a bull call spread by simultaneously selling the November 28-strike calls, which sport a bid price of $0.66.


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