Pressure Builds on Big Natural Gas Stock

08/31/2010 10:04 am EST

Focus: STOCKS

Andrea Kramer

Associate Editor, Schaeffer's Investment Research, Inc.

Andrea Kramer of Schaeffer’s Investment Research says Chesapeake Energy’s stock is squeezed by long and short options players, and it’s struggling to break out of its range.

[Last Friday, August 26th,] Chesapeake Energy (NYSE: CHK) was downgraded to Neutral from Overweight by analysts at Simmons & Co. However, though the shares of [the big natural gas producer] followed the broader equities market higher [during last Friday’s big up move,] the negative analyst attention could prove ominous for the commodities concern, considering the security's bullishly biased sentiment backdrop.

According to Zacks, CHK harbors 18 Strong Buys and five Buy ratings, compared to 12 lukewarm Holds and only one recommendation [of Sell or worse]. In the same vein, Thomson Reuters deems the consensus 12-month price target on the equity at a towering $31.86—representing a steep premium of 50% to the stock's closing price of $20.81 on [Monday].

Technically speaking, the optimism surrounding Cheaspeake seems somewhat unjustified, with the shares surrendering [more than 20% of their value] since the start of the year. What's more, the security has underperformed the Standard & Poor’s 500 index (SPX) by 15% during the past 60 sessions, echoing the stock's status as a broad-market laggard. Now, the shares are testing support in the $20-$20.50 neighborhood, which has contained CHK's pull backs since mid-May.

Strengthening the $20 level's role as short-term support could also be the notable accumulation of bearish bets docked at the round-number $20 strike [price]. More specifically, the September 2010 20 strike currently hosts more than 7,800 puts outstanding, making it the clear-cut home to peak put open interest in the newly front-month series.

On the flip side, though, any rebound attempts could be stifled by potential options-related resistance in the $21-$22 region, as the September 21 and 22 strikes harbor more than 21,000 calls combined.

In conclusion, should the shares of CHK continue to struggle on the charts, the high hopes among the brokerage bunch could come back to haunt the stock. A weekly close south of round-number support in the $20 area would place the stock in territory not explored since mid-July 2009, and could trigger a flood of additional negative analysts’ notes.

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