We recommend a bearish trade on Chesapeake Energy Corp. (CHK). Chesapeake has experienced both internal and external disruptions during the last year, which has contributed to more than 50% in losses. These disruptions include management troubles and a fight with Carl Icahn and are still not fully resolved.
The stock most recently took a hit following its earnings report on Nov. 1 after reporting significant third-quarter losses. All of these issues have put pressure on a company that is simultaneously dealing with a bad market for natural gas. CHK is the country’s second-largest natural gas producer and with expectations of mild demand for gas this winter, we expect that pressure to translate into lower prices on CHK.
Natural gas futures dropped significantly today while CHK is still bound in a pennant consolidation. This lag is not all that unusual and often predicts a much faster and deeper decline in the stock once traders catch up with the change in the natural gas market. CHK has a liquid chain sheet but we still strongly recommend using a limit order to enter the trade.
Use a limit order to ‘buy to open’ the CHK Jan 16 Puts (CHK130119P00016000) for a maximum price of $0.50.
Elsewhere in the sector, several key competitors ended Friday’s session in the red, including Nexen (NYSE:NEX), Occidental Petroleum (NYSE:OXY), Goodrich Petroleum (NYSE:GDP), Devon Energy (NYSE:DVN), Encana (NYSE:ECA), Suncor (NYSE:SU) and Anadarko Petroleum (NYSE:APC).
John Jagerson and S. Wade Hansen are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next trade and get 1 free month today by clicking here.