Big Printin’ – Chesapeake (CHK) Calls

by Dan February 9, 2017 3:37 pm • Big Printin'

Yesterday in this space we discussed the price action in crude oil as it nears an important psychological level of $50 ($XOP til You Drop) and the year to date under-performance in energy stocks.  Shares of Chesapeake (CHK), the oil/natural gas producer bounced off of near term support at its 200 day moving average yesterday and followed through today, which has been accompanied by a bullish roll in call options. When the stock was trading $6.32 a trader sold to close 40,000 Feb 8 calls at 1 cent and bought to open 40,000 April 8 calls for 13 cents, or about $520,000 in premium. These calls break-even at 8.13, up nearly 30% from the trading level. A quick look at the one year chart below and you can see that the stock has had its share of 30% plus moves over the last year, and break-even level on these calls is very near the double top from September and December:

CHK 1yr chart from Bloomberg

I suspect this call purchase is an existing long in the stock rolling a call position that exists to add leverage.

While the 1 year chart shows a very healthy uptrend from the 52 week lows, when the stock was being priced for bankruptcy, now up about 300% from those levels, but its important to note that it is still 80% below its 2014 highs and 90% below its 2008 highs:

CHK 10 year chart from Bloomberg

Lastly sentiment in the stock is downright horrible. Wall Street analysts remain overwhelmingly negative with only 6 Buy ratings, 24 Holds and 5 Sells. And the stock has 13% short interest.

While the rise in the stock’s equity value has put the B-word off the table, a precipitous decline in energy prices, coupled with scrutiny for highly levered companies like CHK ($5.5 billion market cap vs $10 billion in debt) would clearly put a target on CHK’s back once again. We’ll keep our eye on this name.