Pre-Earnings Call Buyers Drill Chesapeake Energy Corporation (CHK)

Chesapeake Energy Corporation (NYSE:CHK) is due to report third-quarter earnings ahead of tomorrow's opening bell, and short-term calls are popular

Nov 2, 2016 at 10:56 AM
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It's been a dismal start to November for oil stock Chesapeake Energy Corporation (NYSE:CHK), with the shares down 6% since Monday's close to trade at $5.18, lingering near their lowest level since early August. However, this is just par for the course for CHK stock, which has turned in the worst November performance of any S&P 500 Index (SPX) component over the past 10 years. Nevertheless, with CHK's third-quarter earnings report due tomorrow morning, CHK options traders have been eyeing a near-term bounce -- targeting out-of-the-money front-month calls in recent weeks.

Taking a quick step back, speculative players have shown a preference for calls over puts among options set to expire in three months or less, per CHK's Schaeffer's put/call open interest ratio (SOIR) of 0.97. What's more, this ratio ranks in the 24th annual percentile, meaning traders are more call-heavy than usual toward the energy stock.

In the past 10 sessions, specifically, CHK's November 7 strike has seen the largest rise in call open interest, with 11,904 contracts added. In fact, this strike is home to peak open interest in the front-month series, with 22,050 contracts outstanding. According to the major options exchanges, a large portion of this activity has been of the buy-to-open kind, meaning call buyers are anticipating a breakout above $7 by expiration at the close on Friday, Nov. 18.

Today, CHK options traders are targeting even nearer-term options. Amid relatively light volume, the stock's weekly 11/4 5.50-strike call has seen the most action, with 1,301 contracts on the tape so far. It looks like some of these calls are being bought to open, as traders eye a move north of the strike by this Friday's close, when the weekly options expire.

Considering more than 15% of CHK's float is sold short -- up nearly 6% in the most recent reporting period -- there could be an ulterior motive to the call buying. Specifically, short sellers could be purchasing the out-of-the-money strikes to hedge their bearish bets against any potential post-earnings upside for the security.

Historically, the shares have tended to make big moves the session subsequent to reporting -- although it's been a coin toss as to which side of the ledger CHK lands. Including a 12.1% drop in August 2015 and a 22.8% pop in February, the stock has averaged a single-session post-earnings move of 8.1% in the past eight quarters. This time around, the options market is pricing in a loftier 12.6% swing -- regardless of direction -- for shares of Chesapeake Energy Corporation (NYSE:CHK).

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