Added to CHK Position on Dip
Chesapeake Energy Corp (CHK) is taking a beating today as energy stocks are getting hit across the board. Last week I mentioned that I had a limit order to sell more naked puts on it in addition to the two CHK August 60 puts I already have. I fully expect to have these first two naked puts assigned by August expiration at the latest. I’ll actually be surprised if I don’t get an early option assignment on CHK.
While CHK was trading at $45.02 I sold two CHK September $42.50 naked puts (CHKUT) and received $488.50 after commissions. So far, at 1:00pm, I’ve sold at the high trade of the day. I’m not expecting that to last with the momentum that CHK has dropped. My order actually hit earlier than I expected due to implied volatility hitting nearly 60 for this strike. I expected a spike on a pull back, but this was better than expected.
I’m way down on my original naked puts and if CHK drops more I’ll own 400 shares with an average cost around $48.80 (((200*60) – 488.50 + (200*42.50) – 488.50)/400). If that happens I’ll sell covered calls on all 400 shares at the 47.50 or 50 strike to pull a profit out of a position that has gone really bad. At least that’s the plan for now. I could change my mind and sell covered calls at a lower strike if CHK doesn’t find it’s footing soon. I’m continuing to work this position as opposed to the one I closed out on NVDA last week because I see hope for CHK when (not if) natural gas prices recover. It could be a long time, but my view holds that CHK can rally. Until then, my cost will be low enough to allow me to sell covered calls at a strike and premium that still brings in a nice return.
Comment by Options Strategery
I am picking up nat gas on this pull back. I have a feeling that banks and energy stocks are going to go back to the trend. I am selling CHK 35s across various months. There is a lot of momentum down; the 42.5 strike may not hold.
Comment by kadena
in oct of 05 CHK traded at $40 and while it was overbought it held that area for the next year, you’ve shown alot of patience with it already, and if this is a solid company, a year of successful covered calls could be lucrative, that’s a long scenario, and i imagine you’d rather be out sooner, but in an uncertain market, it may be time to own stock, though that could be more than what you’d like, but i like how you handled the downturn to be in at much better prices, if that happens…
Comment by Options Strategery
It is a solid company. Look at the annual report for profit projection at various natural gas levels. Most of the production is hedged so $9 is a good spot. I think there is some problems if the floor drops out on nat gas.
The recent share issuance should put a floor on the price and the CEO’s repeated buying is a good sign.
Comment by Alex Fotopoulos
Yep, I like seeing the CHK CEO buying. I saw him on CNBC yesterday saying the same. I still wouldn’t be surprised to see CHK drop a little more, but I’m in it for the long term. The premiums are rich enough to use it as a hold and sell far OTM covered calls until it recovers. Once nat gas climbs again, one big hurricane can do it, CHK will rally.