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Chesapeake Energy Option Players Bet On a Big Bounce

Bulls are scooping up CHK's January 2013 19-strike call today

by 12/12/2012 12:58 PM
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Calls have been in favor on Chesapeake Energy Corporation (NYSE:CHK - 17.19) in recent weeks, despite the stock's dreary year-to-date performance. During the course of the past 10 sessions, traders at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open 318 calls for every 100 puts. This call/put volume ratio of 3.18 ranks in the 92nd percentile of its annual range, indicating bullish bets have been picked up over bearish with more rapidity just 8% of the time within the past year.

This trend can also be seen in the stock's bullishly aligned Schaeffer's put/call open interest ratio (SOIR). CHK's SOIR of 0.73 ranks four percentage points above a yearly low, implying short-term speculators have rarely been more call-heavy toward the stock.

This campaign for calls is continuing in today's session. Roughly 7,100 call contracts have changed hands at last check, more than double the number of puts traded. Option players are turning to CHK's January 2013 19-strike call, which has seen nearly 1,550 contracts cross the tape. Approximately 84% of these have gone off at the ask price, and implied volatility has ticked higher -- indicating buy-to-open activity.

By purchasing these out-of-the-money calls for a volume-weighted average price (VWAP) of $0.23, speculators need CHK to topple the $19.23 mark (the strike plus average premium paid) by January expiration in order for these bets to be profitable. This breakeven level is a healthy 11.9% lift from CHK's current perch.

This tendency toward bullish bets is a bit puzzling, given the stock's technical backdrop. As touched upon, the shares have lost nearly 23% of their value in 2012. What's more, the equity has underperformed the broader S&P 500 Index (SPX) by more than 15 percentage points over the past two months. CHK is currently facing off against its 20-day moving average, which has been surpassed only once, on a daily closing basis, since Oct. 31.

Given that CHK has added around 1% in December, this uptick in buy-to-open call activity could be indicative of short sellers hedging their bearish bets against additional gains. Short interest rose 10.1% in the most recent reporting period, and now accounts for 14.5% of the stock's available float.

CHK is up 0.6% in today's session, after last night's announcement the natural gas concern is selling the remainder of its midstream assets to Access Midstream Partners LP (NYSE:ACMP) for roughly $2.16 billion in cash. The stock was last seen trading at $17.19, just a hair's breadth above its 20-day moving average.


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