It’s been a rough year for Chesapeake Energy (CHK) and if Thursday’s 3% dive is any indication, it’s about to get rougher.
Plagued by plunging oil prices and widespread weakness in the energy sector, CHK stock has tumbled a harrowing 56% since last June. The bears have wrested control of the oil stock and are providing little reprieve for wounded shareholders.
On the technical front CHK stock is locked in a steep downtrend. With Thursday’s plunge the stock is staging another in a long line of breakdowns. Prior support breaks have seen strong downside follow-through so don’t be surprised if the dive in Chesapeake continues.
If part of the blame for Chesapeake Energy’s ills lies with crude oil crash, then it’s a wonder why the ongoing rebound in crude prices hasn’t ushered in any type of commensurate bounce in CHK stock.
CHK Options Beckon
Not surprisingly, the ongoing CHK bloodbath has increased implied volatility for its options. With an implied volatility rank just shy of 60% option premiums are elevated, and thus more attractive to sell.
Those looking to profit from the continued demise of CHK could sell the Jul $14/$16 call spread for 34 cents. Consider it a bet that CHK stock sits below $14 by July expiration — which is certainly will if the downtrend persists.
The maximum reward is limited to the initial 34-cent credit. The maximum risk is limited to the distance between strikes minus the net credit, or $1.66, and will be lost if CHK musters up the strength to rally back above $16.
By risking $1.66 to pocket 34 cents, the spread offers respectable return on investment of 20%.
If that doesn’t sate your profit-seeking appetite, consider a straight long put play for the potential to really rack up the dough should CHK stock make a kamikaze run for the single digits.
Buy the Aug $14 put for $1.80. The risk is capped at the initial $1.80 investment while the reward is unlimited until — and if — Chesapeake reaches the ultimate and impenetrable support level of zero.
At the time of this writing, Tyler Craig had no positions on any of the aforementioned securities.
