Tuesday January 27, 2009
Navivest

Shares of Chesapeake Energy (CHK) closed at $15.80 after gaining $0.90 for 6.04%, partly on rumors that the company might be an acquisition target for oil giant, BP (BP).

While the price action does not signify anything, energy related stocks as a whole, were up today, the options activity on Chesapeake tell a different story.

The number of options contracts on CHK traded today, totaled roughly 56,000, while average daily volume is usually 35,000.

Volume on the February ’09 17.50 calls was 20,645 against an open interest of 12,936, the February ’09 20 calls had a volume of 21,123 against an open interest of 8,807 and the February ’09 22.50 calls had a volume of 6,856 against open interest of 2,661. Volume on the puts side was much lighter.

We recommend buying the February ’09 15 calls. They closed at $2.15 on the ask side. We recommend buying up to $2.30. With the options being in the money, the trade has a lower risk profile and CHK does not have to move by much to the upside, for the trade to be profitable.

If there isn’t a preponderance of bad news in the morning and stock opens to the upside, then enter trade. We would also recommend taking profits if the calls are up more 10% or more on the day.

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Tags: Chesapeake Energy  BP  Option Trade  Option Recommendation