Despite some recovery of late, oil and natural gas prices have remained volatile during the past month. OPEC’s production cut remains in effect, and the cartel is expected to extend those cuts into the latter half of 2017 at its next meeting. Despite the cuts, global supply remains elevated, keeping pressure on energy prices and energy stocks like Chesapeake Energy Corporation (NYSE:CHK).
Click to Enlarge The past month has been a roller coaster ride for CHK stock. The shares surged from their late March lows near $5 to tag a near-term high north of $6.50 in mid-April, only to reverse course sharply as energy prices came under pressure from supply data. Still, Chesapeake Energy stock has come out better despite the volatility, and is now perched just above growing support in the $5.50 region.
Looking back, it seems the infamous “death cross” of CHK’s 50-day and 200-day moving averages had less impact than many had feared. Furthermore, I hope that those of you that got into April $5.50/$6 bull call spread I highlighted on March 27 closed out that trade in the first week of April when the position hit its maximum profit potential.
With earnings season kicking into high gear, CHK stock traders are now looking forward to Chesapeake Energy’s fiscal first quarter earnings report, slated for release on May 4.
Earnings are expected to explode higher from a loss of 10 cents per share last year to a profit of 18 cents per share in the most recent quarter. Additionally, revenue is expected to rise 18.8% year-over-year to $2.32 billion.
Despite the solid year-over-year growth, there isn’t much enthusiasm surrounding Chesapeake Energy’s quarterly report. In fact, the only bullish reading ahead of the report is the EarningsWhispers.com report that the whisper number comes in at 20 cents per share, two cents higher than the consensus.
But there is little bullish sentiment beyond this figure. For instance, Thomson/First Call reports that only six of the 35 analysts following CHK rate the shares a “buy” or better. Furthermore, short interest stands at 127.8 million shares, or 14.6% of CHK stock’s total float.
Even options traders are jumping on the bearish bandwagon. Currently, the 5 May put/call open interest ratio rests at a lofty reading of 1.39, with puts easily outnumbering calls among options most affected by Chesapeake Energy’s quarterly report. That said, this ratio plunges to 0.51 for the May series, indicating that while options traders have little hope for an earnings rally, they are looking for a rebound for the rest of the month.
Overall, 5 May implieds are pricing in a potential post-earnings move of about 9.8% for CHK stock. This places the upper bound at $6.05, while the lower bound lies at $5.
2 Trades for CHK Stock
Call Spread: Given the negativity levied against CHK stock heading into earnings, I’m inclined to once again bet against the grain on the shares. Traders looking for a contrarian earnings play might want to consider a 5 May $6/$6.50 bull call spread. At last check, this spread was offered at 6 cents, or $6 per pair of contracts. Breakeven lies at $6.06, while a maximum profit of 44 cents, or $44 per pair of contracts, is possible if CHK closes at or above $6.50 when 5 May options expire.
Put Sell: Once again, a put sell position could provide a solid return if you’re looking for a more neutral-to-bullish play on CHK stock. Currently, a 5 May $5 put sell has a good chance at finishing out of the money. At last check, this option was bid at 10 cents, or $10 per contract.
As usual with a put sell, you keep the premium as long as CHK stock closes above $5 when May options expire. On the downside, if CHK trades below $5 prior to expiration, you could be assigned 100 shares for each put sold at a cost of $5 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
