Put activity is abnormally heavy today on Chesapeake Energy Corporation (CHK), with roughly 14,000 contracts crossing the tape so far. Today's surge in put trading represents approximately two times the stock's expected put volume of about 6,500 contracts.
Today's most popular put is CHK's April 24 strike, where 4,623 contracts have changed hands. Nearly all of the put contracts at this strike have traded at the bid price, revealing a strong bias toward selling activity. The April 24 put is already home to substantial open interest of 13,145 contracts, all of which are out of the money.
By selling puts at the April 24 strike, speculators are essentially wagering that CHK will remain afloat above $24 through April expiration. This will allow the sold puts to expire worthless, and the trader may retain the initial premium collected as his maximum potential profit. Essentially, this is a neutral-to-bullish bet on the underlying equity.
Today's spike in put selling is a deviation from the recent trend for CHK, which has seen a heavy dose of put buying during the past couple of weeks. The stock's 10-day International Securities Exchange (ISE) put/call volume ratio stands at 1.82, as traders have purchased nearly two times more bearish bets than bullish during this time frame. This ratio ranks in the 99th annual percentile, marking a near-peak of pessimistic speculation on this exchange.
Nevertheless, calls remain the options of choice among options slated to expire within three months. CHK's Schaeffer's put/call open interest ratio (SOIR) weighs in at 0.43, with calls more than doubling puts among near-term contracts. This SOIR ranks in the relatively complacent 37th annual percentile.
However, it's worth noting that this indicator has leapt significantly higher from its near-term low of 0.39, in the second annual percentile, which was tagged as recently as Feb. 26. The SOIR's sudden rise confirms that traders have recently adopted a more negative attitude toward CHK, in keeping with the strong bias toward put buying seen on the ISE.
So, does today's uptick in put selling suggest that option players are growing slightly less skeptical of the stock? It's probably too soon to deem this an outright shift in sentiment, so traders will want to keep an eye on the equity's sentiment setup during the near term. That being said, there's definitely a case to be made for support in the mid-20s.
In fact, CHK has only closed one month below the $24 level since September 2009 -- and only by a hair's breadth, at that. Support in this area could be reinforced by the stock's rising 10-month moving average, which has guided the shares modestly higher since July 2009. Plus, this long-term trendline recently completed a bullish cross with its 20-month counterpart, confirming the equity's trend higher.
If CHK continues to hold steady above technical support, a reversal of skepticism among speculative investors could work in favor of today's April 24 put writers. As the weaker bearish hands throw in the towel and hit the exits, the resulting buying pressure should help keep the shares afloat above this popular put strike.
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