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As Chesapeake Energy Corporation (NYSE:CHK - 20.40) follows the broad markets into the red today, option players are placing bets on a further decline in the near term. Roughly 29,000 puts have changed hands so far, compared to around 12,000 calls. CHK's February 20 and 20.50 puts have emerged as the two most active strikes, where a collective 10,774 contracts have traded. The majority of the contracts at each strike has gone off at the ask price, implied volatility has ticked higher, and data from the International Securities Exchange (ISE) suggests a number of these positions are being bought to open.
Taking cues from Monday's group of skeptics, buyers of the February 20 puts expect CHK to finish tomorrow's session -- when front-month options expire -- south of the $20 mark. More specifically, these near-the-money puts are being purchased for a volume-weighted average price (VWAP) of $0.07, making breakeven $19.93 (strike less VWAP), or 2.3% below current levels. Meanwhile, the in-the-money February 20.50 puts are being traded for a VWAP of $0.27. In other words, CHK needs to fall 0.8% to land below breakeven at $20.23 by Friday's close. Should the stock fail to breach either level, the most today's put buyers can lose is the initial premium paid.
Technically, CHK has been moving steadily higher since the start of the year, with the stock up almost 23% in that time. More recently, the equity has found a solid foothold atop the round-number $20 level, which has proved supportive throughout February.
In the near term, CHK could find itself churning near its current perch, with peak put and call open interest in the soon-to-expire front-month series of options residing at the 20 strike. An equity can often get "pinned" to an area that has hefty accumulations of both puts and calls, as the hedges related to the contracts begin to unwind ahead of expiration.