Call Options Or Put Options On Chesapeake Energy (CHK)?

| April 18, 2012 | 0 Comments

CHK OptionsChesapeake Energy (CHK) is the 2nd largest natural gas producer in the US.

They have a stake in 45,700 natural gas wells in the US and proved reserves of 19 trillion cubic feet of natural gas equivalents.

Simply put, the company is loaded with natural gas assets.

Unfortunately, natural gas prices stink. It just plummeted through $2 for the first time in a decade.

The plunge in natural gas prices has slashed the value of CHK over the last year.  It’s down nearly 50% from its $35.34 52-week high.

Is now the time to buy call options on CHK as it rebounds?  Or should you buy puts on CHK as it continues to fall off the map?

The bulls make a convincing argument…

This former high flying stock is now trading at a deep discount.  If natural gas prices rebound, CHK will soar.

How much lower can natural gas prices really go?  $1.50 or $1.00!?!

At some point, production will fall, demand will increase, and the price will stabilize.  It’s Economics 101…

Just look at natural gas prices globally.  They’re much higher in other places than they are in the US.  At some point, the gap is going to narrow.  And the fundamentals don’t support falling prices globally.  That means prices here will go up.

What’s more, CHK has a rock solid balance sheet and the ability to monetize assets to meet any short term cash shortages.

They’ve already generated more than $2 billion from recent asset sales.  And they could generate $10 billion to $12 billion at the drop of a hat if needed.

The bottom line is CHK is a first class company trading at a huge discount.

But the bears have a compelling case as well… 

The bears say low natural gas prices are here to stay.  They point out the freshly drilled wells in the US shale boom are going to continue pumping out too much gas.

There’s simply no outlet for the glut of natural gas in the US.  And there’s no way to bring on enough new demand to improve prices in the short run.

And if natural gas prices remain below $2 for an extended period, CHK will be forced to sell more assets to raise cash.  And the more assets they sell, the less the company is worth.

If you think natural gas prices are on the verge of a rebound, take a look at buying the CHK July 2012 $22 Calls for around $0.44.

If you think natural gas prices still have further to fall, take a look at buying the CHK July 2012 $13 Puts for around $0.55.

Good Investing,

Corey Williams

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Category: Call Or Put Options?

About the Author ()

A former banking executive, Corey Williams is the Chief Options Strategist and co-editor of our well-known daily newsletter, Options Trading Research. Corey’s extensive experience with options goes all the way back to his days in corporate finance. It was this decade in banking where Corey discovered the most important skill an options trader can have– the ability to analyze a company or sector to determine its likely future direction. And now he’s brought this background, experience and love of options to Options Trading Research, the unique daily e-letter devoted exclusively to helping individual investors profit from the very lucrative options market.