Friday, January 16, 2015

CHK Option Trade

Click on Chart to Enlarge

I purchased a call option position on CHK today for 2.48 April 18 strike call.

CHK is an energy related stock, which is in the oil industry which obviously has been hammered down in price recently.

However, there are some signs that the oil downtrend may be near exhaustion, and that CHK may be one of the sector that is showing relative strength on the charts.

Notice that oil has been making new lows into this week.  However, CHK bottomed with a double bottom reversal on 12/12/14.  Now on oils push to new lows, CHK has held well above the the 12/12/14 low.  This creates a non-confirmation with the underlying commodity and is a sign that CHK is basing and ready for a move higher.

A subtle note on short interest is that during this downtrend, the short interest has consistently risen as CHK has rallied and then declined as price declined.  The same pattern did happen again as price rallied in CHK into late December.  HOWEVER, now that price has declined but did not make a new low, and there is the real possibility of a break above the December highs if oil strengthens, then it seems likely to me that there would be some short covering forced on a break of that price peak around 20.40 on CHK.

For stocks one could be long with a stop below this week's low, and then exit at a limit of 23.04, which is the fill of a large gap down.  That would be a solid reward/risk play, and one with a clear logic behind it.  I am in the call option with plenty of time for a significant move and, in my estimation, a very good probability that this option will at least double in price at some time prior to expiration.  The key will be to make a timely exit or scale out if prices do rise.

Let me know if there are other oil related issue that you would like looked at.


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