Chesapeake Energy Stock
Buy When this Happens
Back in December 2011, I inked a piece for Wealth Daily about the absurdity and unpredictability markets would undergo in 2012.
I said the Dow would test 9,500 this year, based on what I was seeing in the latter part of 2011.
While 9,500 is no longer likely – with money printing staving off the implosion of economies – we could still see a 3% to 5% pullback in the Dow.
Economic news is still embarrassing. Americans are still suffering. China is cooling off. Europe is on life support with a heavy debt burden and more requests for bailouts.
And “calm” analysts are running scared.
The Dow has had a hard enough time tacking on 300 points to the upside since the year began.
I'd love nothing more than to tell you all is fine. That the economy is rebounding. That Europe is saved.
But I can't. And I won't.
That's not to say there aren't pockets of strength in this market. For instance, since the start of June 2012, my options readers raked in:
46% and 36% gains on Facebook September 30 puts
57% and 167% gains on Arena Pharmaceuticals 6 calls
67% and 35% on Navistar July 30 puts
26% on Vivus Inc. September 24 calls
84% on Arena Pharmaceuticals July 8 calls
45% on Arena Pharmaceuticals July 8 puts
And 30% on Facebook 30 calls
It's all about being in the right place at the right time in this market...
These days one of those right places is in cheap, beaten down commodity stocks.
At the beginning of this month, the dollar spiked to unsustainable highs. We explained that the 5% upside move just couldn't last.
And it didn't...
It pulled back from a high of 83 to 81.5. And commodities rallied. Gold was up from 1,560 to 1,630.
Since then, the dollar spiked again. And the Fed can't be happy.
While we don't expect the Fed to act in any way, we do expect to hear that they “have the tools to fight this if necessary.”
That alone would bring the dollar back down, send commodities back up, and hopefully keep a 3% to 5% correction at bay.
Chesapeake Energy (NYSE: CHK)
A month ago, I urged readers to buy into Chesapeake Energy and the January 2013 17.50 calls at market.
I didn't really care what the overall market was doing.
I was trading a technical R-4 Trigger setup.
The stock had been on my watch list since a 44% beatdown on allegations that its CEO had a conflict of interest because he used stakes in CHK wells as collateral for loans.
As I wrote, “it's wildly oversold after another 13% drop. That, and MACD and Williams % Range all say its oversold, as it trades at the lower Bollinger Band.”
“The best way to trade this situation is by buying long-dated calls, such as the January 2013 CHK 17.50 calls at market. As soon as the smoke clears, the stock is likely to move up from here. And I'd rather not have to deal with near-term time decay with the bears battling for further immediate term downside,” I said.
The crowd had simply gotten far too bearish. They were crowding the wrong side of the trade, as over-abundant negativity was priced in.
We were buying Chesapeake as the headlines screamed scandal, sending the stock to $15.
We got the stock for a cheap $15 a share before it ran to $20.
It was a 33% gain for stockholders. But an 80% gain for those smart enough to buy the options.
I'm now recommending you buy more on dips at or below the lower Bollinger Band. Williams % Range is telling us CHK shares are grossly oversold here and could be heaed higher.
Chesapeake was one of the only stocks up Thursday morning after hitting those R-4 triggers.
It's been quite a wild ride for shares of CHK, and we like it that way. We're buyers... again.
Stay Ahead of the Herd,
Ian Cooper has been trading stocks and options for 12 years. He contributes options, stock, and energy commentary to Wealth Daily, Wealth Wire, and Options Trading Pit. He's the Coach behind Options Trading Coach, a beginner's guide on how to trade options. Ian teaches thousands of loyal subscribers the many ways to be profitable from options rather than simply buying stocks alone. For more about Ian, take look at his editor's page.