Last week during a Mad Money broadcast, host Jim Cramer had some positive things to say about Chesapeake Energy CHK. He noted that the energy company is “very well run” and likes Chesapeake's plans to expand further into the oil market rather than limiting itself to the natural-gas business.
CHK is off about 10% year-to-date but has enjoyed modest gains in the past month or so. The natural-gas picture is similar; the commodity fell from near $6.75 (per million British Thermal Units) in January to $3.50 in mid-October but has now bounced back to around $4.10. Oil, on the other hand, has been range-bound between $75 and $90 a barrel all year and is approaching the upper end of this trading range.
As winter approaches, opinion is often mixed for commodities themselves and the companies that provide them. One school of thought thinks cold temperatures are a definite boon for natural-gas and electricity companies that power the nation's heaters. Others believe this hypothesis is always built into the shares already, leading to potential downside if the winter winds up being mild.
For the bulls and bears out there who are curious about different ways to play CHK, we've outlined two strategies – one on either side of the fence. These are for educational purposes only; remember to consider your personal risk tolerance and investing goals before attempting any new strategies. All prices are as of Tuesday midday, when CHK shares were at $23.41, up 71 cents on the day.
Bullish Option Strategy: Stock Replacement Strategy
Using a long call to express a bullish thesis on a security is sometimes referred to as the “stock-replacement” strategy, as the trader is buying the call in lieu of buying or holding the shares outright. For CHK, an investor could spend $3.45 on the April 21 calls ($345 per lot) compared to spending $2,341 for a long stock position of 100 shares.
If CHK rallies above the breakeven price of $24.45 (strike price plus premium paid) by expiration, the call buyer can potentially enjoy unlimited upside. This would require a move of about 4.5% over the next 158 days. On the downside, loses are limited to the premium of $3.45 no matter how far CHK retreats. Losses are capped at 14.7% of the potential loss for the stock holder.
The profit/loss chart below illustrates how gains are unlimited to the upside while losses level out at $3.45 south of the 21 strike. The OptionsHouse platform makes this and other tools available for all customers who open a virtual options trading account.
Bearish Option Strategy: Bear Put Debit Spread
Investors expecting lower natural-gas prices for the first half of the winter might consider a bearish strategy with limited risk and limited reward, such as a bear put spread (also known as a long put spread). The January 20/22.50 put spread can be purchased for a net debit of 61 cents (buying the 22.50 put and selling the 20 put simultaneously).
At expiration, if CHK is trading below the short strike (20), gains are maximized at $1.89, which is the difference in strikes less the premium paid. If CHK is above the 22.50 strike, losses peak at 100% of the premium paid. Breakeven at expiration in mid-January is $21.89; as long as the shares are below this level, the spread will be profitable.
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The above information is provided by OptionsHouse, LLC (“OptionsHouse”) for informational and educational purposes only and is not intended as trading or investment advice or a recommendation that any particular security, transaction, or investment strategy is suitable for any specific person. You are solely responsible for your investment decisions. Commentary and opinions expressed are those of the author/speaker and not necessarily of OptionsHouse. Neither OptionsHouse nor any of its employees, officers, shareholders or affiliated companies guarantee the accuracy of or endorse the views or opinions of guest speakers or commentators. Projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature and are not guarantees of future results. Any examples used that discuss trading profits or losses may not take into account trading commissions or fees.
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