Volatility junkies are all over Chesapeak Energy Corporation (CHK) these days. Year-to-date CHK stock has fallen 66%, rallied 396%, and once again fallen 46%. The only way to stay sane in such a whirlwind is to remain nimble. That, or bet small and hold for the long run for the eventual demise or recovery of CHK.
As promising as CHK stock’s two month recovery was looking, much of the ground gained has been quickly forfeited following last week’s earnings announcement. The high volume swoon has taken the stock back below all moving averages reversing its nascent uptrend in the process.
CHK isn’t the only beaten-down commodity stock to bite the dust recently. Metal and mining stocks have also seen out-sized selling alongside the energy slide.
CHK Stock Options Pick ’em
Picking the next move in CHK is a bit tricky here. On the bearish side the stock just slipped into a downtrend once again. The two month rebound has been upended like every other recovery in the stock over the past two years. On the flip side CHK stock is extremely oversold. That 46% drop mentioned earlier transpired in the past two weeks alone — a harrowing move in such a short period of time. So it’s not as if this is a low-risk entry for new bear trades.
Nonetheless, if you think Chesapeake shares will eventually retest their February lows near $1.30, consider buying the Oct 4.50 put for $1.40 or better. Using a put is a far better alternative to shorting stock here since the risk is limited to the initial $1.40 debit. That way if CHK stock stages another insane 400% rally your loss is capped.
If you regret missing out on Chesapeake’s recovery (i.e. the moonshot to $7.50) and are wanting to bottom fish, this dip is certainly providing a lower-risk entry. Heck, if the selling pressure persists you may have the opportunity to snatch shares up in the $3 region. No need to buy CHK call options for an eventual recovery though. At $3 or $4 the stock effectively is a call option.
So, if you want to roll the dice simply position size so you can risk the cost of the position. For example, if you’re willing to risk $400 in the trade and end up buying CHK at $4, then purchase 100 shares. That way you’re comfortable with the risk if CHK stock eventually rendezvous with zero.
At the time of this writing Tyler Craig had no positions in any of the aforementioned securities.
