After last week’s market correction, practically everything is trading oversold. This includes oil and natural gas prices. What’s more, natural gas prices, in particular, have already priced in warming weather as we head into spring. What this means is a potentially bullish opportunity for companies like Chesapeake Energy Corporation (NYSE:CHK).
Despite a global shift toward green energy, much of the global economy still runs on fossil fuels. My colleague Matt Badiali over at BanyanHill.com predicted considerable gains for oil prices and related companies in 2018. Matt has excellent insight on the commodities sector.
But, when you combine this bullish outlook with current oversold pricing in the natural gas and oil markets, you get considerable upside potential over the short term. Natural gas, for one, has already priced in slowing spring demand and then some after last week’s correction. Furthermore, President Trump just announced plans to spend $200 billion on infrastructure, which is sure to have a bullish impact on commodities across the board.
Click to EnlargeInstead of diving into the wild west of futures commodities options, you can take advantage of this pricing disconnect by trading stocks like Chesapeake. CHK stock, itself, is considerably oversold at the moment. Last week’s market correction took the shares down to levels not seen since March last year.
CHK stock is now trading more than 55% below the average consensus price target of $4.42. Not only does this signify that CHK is a bargain at current levels, it leaves plenty of upside potential before valuation concerns kick in.
Additionally, only four of the 29 analysts following Chesapeake Energy stock rate the shares a “buy” or better. A rebound in natural gas prices over the short term or additional news on Trump’s infrastructure spending could prompt a round of upgrades from this bearish bunch.
Short interest is also a potential driver for a CHK stock rebound. As of the most recent reporting period, the number of CHK shares sold short totaled 151.6 million, or about 17.22% of the stock’s total float. A solid rebound from current levels could prompt many of these shorts to take profits, thus providing additional buying power for CHK stock.
Finally, CHK’s options backdrop is quite bullish. Either speculators are betting on a sharp rebound, or short sellers are hedging their bets against a short-squeeze. Currently, CHK stock’s March put/call open interest ratio stands at 0.37, with calls nearly tripling puts among options set to expire within the next month.
Overall, March implieds are pricing in a potentially serious move of more than 23% for CHK stock. This places the upper bound just shy of $4 at $3.77, while the lower bound lies near $2.30.
2 Trades for CHK Stock
Call Spread: Traders looking to take advantage of a short-term rebound for CHK stock might want to consider a March $3/$3.50 bull call spread. At last check, this spread was offered at 11 cents, or $11 per pair of contracts. Breakeven lies at $3.11, while a maximum profit of 39 cents, or $39 per pair of contracts — a potential 250% return — is possible if CHK stock closes at or above $3.50 when March options expire.
Put Sell: Alternately, if you’re looking for a more conservative play on CHK stock, a March $2.50 put sell has a good chance at finishing out of the money. At last check, this option was bid at 26 cents, or $26 per contract. As usual with a put sell, you keep the premium as long as CHK stock closes above $2.50 when March options expire. On the downside, if CHK trades below $2.50 prior to expiration, you could be assigned 100 shares for each put sold at a cost of $2.50 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.