Long Chesapeake Energy Corporation (CHK) Stock? Give Up.

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All is not well for the energy sector, and that spells trouble for Chesapeake Energy Corporation (NYSE:CHK). The liquid natural gas specialist was already in trouble heading into this year, burdened under a mountain of debt and battling low natural gas and energy prices. And things are getting worse for CHK stock.

Long Chesapeake Energy Corporation (CHK) Stock? Give Up.

My advice? Don’t struggle to swim upstream, and instead consider one of two bearish trading ideas that are setting up right now.

This year was supposed to be a boon for Chesapeake Energy. OPEC cut production across the board, and even extended those cuts for a longer-than-expected nine months. Additionally, President Donald Trump campaigned on a platform of supporting U.S. energy production.

However, there is a spat brewing in amid oil producers in the Middle East that could threaten those production cuts. Over the weekend, Saudi Arabia, Egypt, Bahrain and UAE severed diplomatic relations with Qatar, accusing the latter of interfering with their internal affairs and backing terrorism.

What’s more, Russia’s largest oil producer doesn’t believe the cuts amount to much anyway. “A number of large-scale oil producers that do not take part in these agreements use such conditions to strengthen their market positions, and that leads rather to new imbalance than to the sustainable development,” Rosneft CEO Igor Sechin said over the weekend.

If that wasn’t enough, analysts are beginning to fear that America’s backing out of the Paris climate accord means more drilling and production stateside, leading to increased global supply and lower energy prices.

CHK stock chart
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The overall results have been ugly for Chesapeake Energy. Year-t0-date, CHK stock is down more than nearly 30%, more than doubling a decline of about 14% it’s peers in the Energy Select Sector SPDR (ETF) (NYSEARCA:XLE).

Despite a brief pop in April, CHK has continued its downward spiral unabated. In fact, the shares hit a fresh 52-week low on Friday below former support in the $5 region.

Turning toward the sentiment front, we find a growing hoard of bears.

For instance, Thomson/First Call reports that only nine of the 35 analysts following the shares rate them a “buy” or better. Meanwhile, the 12-month price target rests at $6.94, implying almost 42% upside for the shares over the long-term.

In other words, there is still room for potential downgrades and plenty of room for price target cuts as CHK stock continues lower.

Elsewhere, short sellers have grown bold in recent weeks. During the most recent reporting period, the number of Chesapeake shares sold short surged by 15% to roughly 162 million, or 18.45% of the stock’s total float. With the stock facing a multitude of problems, don’t expect these shorts to cover any time soon.

In fact, increased shorting activity could provide additional selling pressure.

According to Chesapeake’s options activity, short sellers are taking precautions against any short-term blips, like the one we saw in April. Currently, the June put/call open interest ratio stands at 0.55, with calls nearly doubling puts among options set to expire within the next month.

Overall, June implieds are pricing in a potential move of about 8.4% for Chesapeake stock over the next month. This places the upper bound at $5.42, while the lower bound lies at $4.58.

2 Trades for CHK Stock

Put Spread: Traders looking to jump on the bearish bandwagon might want to consider a Jun $4.50/$5 bear put spread.

At last check, this spread was offered at 17 cents, or $17 per pair of contracts. Breakeven lies at $4.83, while a maximum profit of 33 cents, or $33 per pair of contracts, is possible if Chesapeake Energy closes at or below $4.50 when June options expire.

Call Sell: If a more neutral-to-bearish stance fits your trading style, then a Jun $6 strike call sell position may fit the bill. Such a trade is especially useful if you already own CHK stock, as it allows you to offset some of your portfolio losses in the event of a selloff, but also allows you exposure to any upside up until the stock trades at or above $6.

At last check, this option was bid at 3 cents, or $3 per contract. A sold call allows you keep the premium as long as CHK stock closes below $6 at expiration.  On the downside, if CHK rallies above $6 prior to expiration, you could be forced to provide 100 shares at current market value for each call sold, which could be quite costly if you do not have enough stock on hand to cover the call.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2017/06/long-chesapeake-energy-corporation-chk-stock-give-up/.

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