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Chesapeake Energy (CHK) Bears Bet Against Support

Put players are targeting CHK's 20 strike today

by 2/11/2013 1:32 PM
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Puts have emerged as the options of choice on Chesapeake Energy Corporation (NYSE:CHK - 20.07) in today's session. Around 17,000 puts have crossed the tape so far, more than doubling the number of calls that have been exchanged. CHK's 20 strike is in focus, with traders betting on a breach of this newfound layer of support during the next few months.

Jumping right in... two of the most active put strikes in today's session are CHK's February 20 and April 20 puts, which have seen roughly 1,100 and 11,100 contracts change hands, respectively. The majority of contracts at both strikes have crossed at the ask price, and implied volatility has ticked higher, indicating the initiation of new bearish positions.

By buying to open the slightly out-of-the-money February 20 puts for a volume-weighted average price (VWAP) of $0.23, traders need CHK to finish south of $19.77 (strike price less VWAP) at the end of the week, at which point front-month options expire. Meanwhile, priced a bit higher due to time premium, the VWAP of the further-dated April 20 puts -- which expire on Friday, April 19 -- is $1.20, making breakeven $18.80. Moves of this magnitude require a respective 1.5% and 6.3% drop from current levels.

Today's bearishly skewed bias is a change of pace for option traders, who have displayed a distinct preference for calls over puts in recent weeks. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), speculators have bought to open 43,166 calls during the past 10 sessions, compared to 20,371 puts. This call/put volume ratio of 2.12 ranks higher than 79% of other such readings taken in the last year, pointing to a healthier-than-usual appetite for CHK calls.

On the charts, the stock has had a solid start to 2013, with the shares up roughly 21% year-to-date. This positive momentum helped the stock muscle through the round-number $20 mark in late January an area that previously served as resistance in mid-2012. In light of this strong technical showing -- as well as the withstanding trend in the options pits -- today's rush toward out-of-the-money puts could simply represent shareholders protecting recent profits against any near-term downside.

In fact, the stock is trading 0.8% lower in today's session, putting its foothold atop the $20 level to the test. At last check, CHK was hovering near $20.07.


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