Good news from Chesapeake Energy Corporation (NYSE:CHK) has this trader thinking it’s time for investors to “spend” a little on CHK stock. But before you do, take some of the speculation out of owning shares using a “married put” strategy to hedge your bet.
Natural gas outfit Chesapeake delivered some good news to Wall Street Tuesday morning, announcing it will spend $1.9 billion to $2.5 billion in 2017. The new capex data narrows prior guidance and provides clarity for CHK stock investors.
Clarity-seeking investors should also be impressed with Chesapeake’s production forecast. The company’s now sees 5% to 15% annual growth through 2020. The more upbeat narrative is a far cry from a year ago when Chesapeake’s survival as an ongoing business was in question both off and on the CHK stock price chart.
Chesapeake’s rebounding prospects have been supported by asset sales, debt reduction and some re-inflation of oil and gas prices over the past twelve months after hitting decade lows. And according to CEO Doug Lawler, “The execution of our 2017 capital program will position Chesapeake for significant production and earnings growth and cash flow neutrality in 2018.”
With an improving picture for Chesapeake on the price chart, it’s time investors consider their own capital investment and spend a little something on CHK stock.
CHK Stock Daily Chart
Over the past year CHK stock has gone from volatile short-covering style reactions, up and down, and into a more developed and stable uptrend.
With last week’s low, shares have pulled back 28% from an early and sudden December double-top high to successfully test the longer-term 200-day simple moving average and up-channel support lines.
Traders using the chart for guidance are risking roughly 50 cents on the downside to see $1.50 to perhaps as much as $3 upside if CHK can resume its rally and retest the prior highs or possibly reach the upper channel line.
Chesapeake Energy Married Put
Given the favorable risk-to-reward situation on the CHK price chart, I like approaching CHK as a married put or synthetic long call. With earnings slated for late next week, the protected position with its open-ended upside makes all the more sense.
Reviewing the Chesapeake options board, the April $6 married put for $6.78 is attractive. With shares at $6.42 this trader is paying 36 cents for more than two months of protection at a key low on the CHK chart.
A trader that simply purchases CHK stock is of course, free to set a stop-loss at the $6 level and the strike of the protective put. But at the end of the day — and particularly with earnings in the picture — there’s always the possibility for major slippage when it comes time to actually exit the position.
With the married put the trader is also initially leaving the upside open in an attempt to take advantage of a larger bullish reaction in CHK. If shares were to rally in front of the earnings event, I’d personally consider selling the April $8 call if it trades for 20 cents or greater versus a current market price of 12 cents.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.