I bought CHK April 7 Calls today.
As always, I look for two triggers before entering a trade. Today, CHK gave me an opportunity that I think justified buying some out-of-the-money calls with 1-2 months to expiration.
Starting with the underlying chart, the key here is that we are holding the 200 Day Moving Average, and that has tended to provide support for us in the past:
Chart from FreeStockCharts.com
As I’ve stated before, the 200 Day Moving Average is a big signal for trend followers – as long as this line can hold, the expectation will be that the bullish trend overall can continue. Assuming this holds, we can look for an initial target into the 20 Day Moving Average at $6.35 and then will be closely monitoring how we handle the upper end of the recent downtrend channel. For the trade to get really exciting, we want to see a move higher and out of the downtrend channel. If we run to the 50 Day Moving Average, we will break out of the downtrend. This would be very positive for the stock. A move toward ~$7 would help signal that the direction of the stock is firmly higher and we can start looking at the recent high of $8.20 as a new target.
Earnings came out this morning and were generally well received. I’m not an expert on earnings and fundamentals, so I will not question the analysis of others here and will trust that this input is (at a minimum) not bearish.
Crude Oil and Natural Gas prices both matter for Chesapeake. Higher prices tend to be good for producers (there’s a lot of other analysis that can be done here, but that’s not the main point of my trade). Crude Oil is higher, but Natural Gas is lower. I’ll consider that a wash, but will have to add $UNG and $USO to my watch list to make sure that I don’t miss an input to this trade.
So far, I see a good technical setup and will consider the fundamentals and commodity prices to be not bearish. This adds to the belief that Chesapeake should be able to hold the 200 Day Moving Average and keep longs in the game.
Now we need to move on to the options market. Buying calls before earnings was too pricey, but we’ve see a nice dip in IV today:
Charts from LiveVol
The low end of Implied Volatility should be around 50%. The upside could push us up to around 60% in Implied Volatility, and so at current levels of about 52% and good upside in the stock price, I’m comfortable buying calls outright with that 1-2 month time frame.
Let’s look at the options markets here:
Screenshot from LiveVol
The $7 calls at ~52% are the cheapest strike in April, which also happens to be the cheapest month in the front of the curve. This is the setup I like with an entry at 17 cents – it allows us to play for an initial move toward $6.35 but stay around for the move over time above $7. If we reach my ultimate target of $8.20, then these calls will be worth ~$1.20. The R&R of risking $0.17 to make $1.03 is very attractive to me. Given that potential upside, I am willing to take some risk here. If a trade has a 6-to-1 R&R, then I have to feel that there is a greater than 1/6th chance that the story plays out in order to have a positive expected value. I think that that is the case given the technical setup, so I’m going to start into CHK April $7 calls and watch the charts for position modifications over the next 1-2 months.
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