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
facebook twitter linkedin


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).

Sign up now for Schaeffer's Market Recap to get all the day's big stock movers, must-know technical levels, and top economic stories straight to your inbox.
 

Minimize Risk While Maximizing Profits

There is no options strategy like this one, which consistently minimizes risk while maintaining maximum profits. Perfect for traders looking for ways to control risk, reduce losses, and increase the likelihood of success when trading calls and puts. The Schaeffer’s team has over 41 years of options trading success targeting +100% gains on every trade. Rest assured your losses are effectively limited to your initial cost at the time of making your move! Don't waste another second... join us right now before the next trade is released! 

 


 


 
Special Offers from Schaeffer's Trading Partners