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Calls Hot as Chesapeake Energy Corporation (CHK) Sizzles

Call buying has grown increasingly popular on Chesapeake Energy Corporation (NYSE:CHK)

Mar 4, 2016 at 1:59 PM
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It's been a wild week for Chesapeake Energy Corporation (NYSE:CHK), as the stock reacts to the scandal surrounding now deceased founder and former CEO Aubrey McClendon. (Yesterday, the Justice Department filed a motion to dismiss the indictment against McClendon.) The majority of the stock's price action has occurred to the upside, with the shares on pace for a 93% weekly advance. Today alone, the stock has added 22.1% to trade at $5.22 -- and the short-term options crowd is calling for even more gains.

Taking a quick step back, calls are trading at four times the average intraday rate this afternoon -- and are outstripping puts by a more than 2-to-1 margin. With 132,708 contracts on the tape, call volume is on pace to notch a new annual high.

The majority of today's action has centered at CHK's weekly 3/11 5.50-strike call, where it appears one large block of 23,344 contracts was bought to open for $1.1 million (number of contracts x $0.47 premium paid x 100 shares per contract). If this is the case, the goal is for CHK to rally north of $5.50 by next Friday's close, when the series expires.

Today's accelerated call activity just echoes a growing bias in CHK's options pits. Over the past five sessions, the stock's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio has jumped to 1.22 from 0.52. What's more, the current ratio ranks in the 63rd annual percentile, meaning calls have been bought to open over puts at a faster-than-usual clip.

Seeing the largest rise in open interest over this five-day time frame has been CHK's April 5 call, where 45,682 contracts have been initiated. According to data from the ISE, CBOE, and PHLX, a portion of this activity has been of the buy-to-open kind, meaning speculative players were betting on a breakout above the $5 mark by April options expiration.

However, there could be an ulterior motive to this recent burst of call buying. With Chesapeake Energy Corporation (NYSE:CHK) still staring at a nearly 67% year-over-year deficit and more than two-fifths of its float sold short, this week's activity in CHK's options pits could be indicative of shorts hedging their bearish bets against any more upside.

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