Chesapeake Energy Options Traders Bet On a Rare Earnings Boon

CHK short sellers may be hedging with long calls, though

Feb 21, 2018 at 11:17 AM
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Chesapeake Energy Corporation (NYSE:CHK) stock has been anything but impressive in the session following the natural gas producer's recent earnings reports. Over the past four quarters, CHK has closed lower the next day each time, averaging a loss of 5.1%. Nevertheless, options traders have been loading up on long calls in recent weeks, ahead of the company's fourth-quarter results -- due out ahead of tomorrow's opening bell.

At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), specifically, speculative players have bought to open 46,510 calls, compared to 7,929 puts over the last 10 sessions. The resultant call/put volume ratio of 5.87 ranks in the 68th annual percentile, pointing to a elevated demand for calls over puts.

Drilling down on the past two weeks' worth of activity, the weekly 2/23 3-strike call has seen one of the biggest rises in open interest, with 10,217 contracts added. Data from the major options exchanges points to at least some buy-to-open activity here, meaning options traders are betting on a move north of $3 by expiration at this Friday's close.

While this could be the result of vanilla bulls, this recent burst of call buying could also be indicative of short sellers initiating an options hedge against any unexpected upside risk. While short interest has been on the decline in recent months, there are still 151.63 million CHK shares sold short -- a healthy 17.2% of the stock's available float.

Analysts are mostly skeptical toward the energy shares, too. Of the 17 brokerages covering CHK, all but one maintain a "hold" or "sell" rating. However, the average 12-month price target of $4.42 stands at a 64.6% premium to the stock's current trading levels. Another negative earnings reaction could spark a flood of price-target cuts for CHK stock.

Looking at the charts, it's not hard to see why there's so much skepticism priced into Chesapeake Energy shares. Year-over-year, CHK stock has shed 55.8%, and has surrendered one third of its value in 2018 alone. What's more, a mid-January rally attempt was quickly halted by familiar resistance at the equity's 160-day moving average. This rejection sent the equity tumbling to a two-year low of $2.53 on Feb. 9, with CHK last seen trading at $2.69 -- down 3.1% so far today.


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