Energy stocks have dominated the market this week. In fact, more than half of the top gainers on the S&P 500 on Monday were energy stocks. Sector favorite Chesapeake Energy Corporation (NYSE:CHK) was among them, gaining more than 2%.
Rising energy prices are the cause of the rally. U.S./China trade fears and OPEC production concerns boosted both oil and natural gas prices. Historically, what’s bullish for natural gas is bullish for Chesapeake Energy.
CHK stock has trended sharply higher in recent weeks due to a renewed focus on natural gas. The commodity continues to gain favor in the energy sector as a low cost (and lower emissions) alternative to coal.
Click to EnlargePrice support for natural gas futures appears to have stabilized in the $2.75-to-$3.00-per-million British thermal units (BTU) area. Breakouts above $3-per-BTU have provided considerable upside for CHK stock, pushing the shares to fresh 52-week highs just shy of $5.
Drilling down the CHK stock technicals, the shares have pulled their 50-day and 200-day moving averages into a bullish cross. Called a “golden cross,” this technical indicator is a “buy” signal for many traders, and it could mean additional upside for CHK shares.
CHK stock also has growing support in the $4.50 region, with stronger long-term support near $4.
That said, market sentiment has not followed the stock higher. For instance, Thomson/First Call reports that only four of the 29 analysts following CHK stock rate the shares a “buy” or better. The 12-month price target also rests at $3.77 — a far cry from CHK’s current perch near $4.60.
But sentiment is shifting. As of the most recent reporting period, the number of CHK shares sold short totaled 175 million — down roughly 11% from the previous period. This wealth of short interest still accounts for a whopping 19.9% of CHK’s total float, meaning the shares are highly vulnerable to a short squeeze situation.
On the other hand, 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 July put/call open interest ratio stands at 0.52, with calls nearly doubling puts among options set to expire within the next month.
Overall, July implieds are pricing in a potentially serious move of more than 8.6% for CHK stock. This places the upper bound at $5.15, while the lower bound lies near $4.33.
Two Trades for CHK Stock
Call Spread: Traders looking to take advantage of a continued rally for CHK stock might want to consider a July $5/$5.50 bull call spread. At last check, this spread was offered at 11 cents, or $11-per-pair of contracts. Breakeven lies at $5.11, 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 $5.50 when July options expire.
Put Sell: Alternately, if you’re looking for a more conservative play on CHK stock, a July $4.50 put sell has a good chance at finishing out of the money. At last check, this option was bid at 20 cents, or $20-per-contract. As usual with a put sell, you keep the premium as long as CHK stock closes above $4.50 when July options expire. On the downside, if CHK trades below $4.50 prior to expiration, you could be assigned 100 shares for each put sold at a cost of $4.50-per-share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.