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.
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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.