Chesapeake Energy Corporation Rally Doesn't Spook Option Buyers

Schaeffer's Investment Research
  SEP 16, 2013 3:17 PM

CHK puts are being bought at a rapid-fire rate.

 


Chesapeake Energy Corporation (NYSE:CHK) has outperformed the broader S&P 500 Index (INDEXSP:.INX) by nearly 25 percentage points over the past three months, notching an annual high of $27.29 just last week. Nevertheless, option traders are purchasing CHK puts over calls at an accelerated clip, either to wager on a pullback or to "protect" their CHK shares from an unexpected downturn.

During the past two weeks, speculators on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open almost two CHK puts for every call. The resulting 10-day put/call volume ratio of 1.79 stands higher than 90% of all other readings of the past year, pointing to a much healthier-than-usual appetite for bearish bets of late.

The out-of-the-money October 24 put has garnered notable attention, with more than 12,000 contracts added during the last two weeks. Meanwhile, the October 26 put has seen more than 11,000 contracts opened in the same time frame. If the puts were bought to open, the traders could be locking in an acceptable exit price for their CHK shares, should the security breach the respective strikes within the next few weeks.

Elsewhere on Wall Street, short sellers have increased their bearish positions by 13.3% during the past two reporting periods. Short interest now accounts for 14.4% of CHK's total available float, representing more than eight sessions' worth of pent-up buying demand, at the stock's average pace of trading.

Meanwhile, despite adding more than 61% in 2013, CHK has yet to convince the brokerage bunch. In fact, just seven out of 24 analysts offer up "buy" or better opinions. Likewise, the consensus 12-month price target of $24.72 represents a discount to CHK's current price of $26.86. Fundamentally, Chesapeake Energy recently announced plans to lay off up to 2,000 workers in an effort to reduce expenses. Technically, the stock is staring up at its 80-month moving average, which acted as support for most of 2011. Should the equity extend its uptrend, an exodus of bears on Wall Street could add contrarian fuel to CHK's fire.

This article by Andrea Kramer was originally published on Schaeffer's Investment Research.

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