Option Activity Alert: Chesapeake Energy and Clean Energy Fuels Corp.

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Natural gas was the name of the game on Wednesday, as options players placed their bets on producer Chesapeake Energy Corporation ( CHK ) and alternative fuel firm Clean Energy Fuels Corp. ( CLNE ). Specifically, CHK was targeted by a skeptical spread speculator, while CLNE continued to draw the attention of call buyers.

Chesapeake Energy Corporation

Put players targeted CHK yesterday, with the International Securities Exchange (ISE) reporting that traders bought to open 1,309 puts during the course of the session. By contrast, only 336 calls were purchased on the ISE yesterday, netting the stock a single-day put/call volume ratio of 3.90.

Taking a closer look at the day's activity, it seems that CHK was targeted by a bearish spread speculator. One pessimistic player initiated a long put spread by buying to open 239 contracts of the January 2011 20-strike put, and simultaneously selling to open 239 contracts of the January 2011 16-strike put.

By opening this debit spread, the trader is revealing that he expects CHK to swallow a modest decline during the intermediate term. In the best-case scenario, the shares would settle squarely at $16 upon January expiration. This would return the maximum potential profit on the purchased puts, while the sold puts could be left to expire worthless.

Wednesday's preference for puts stands in contrast to the recent trend on the ISE, where CHK has garnered a 10-day call/put volume ratio of 3.22. This ratio ranks higher than 76% of other such readings taken during the past year, indicating that traders have actually been purchasing calls over puts at a rapid pace in recent weeks.

However, the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.66 arrives in the 69th annual percentile, suggesting that short-term options players are more skeptically aligned than usual.

In the same vein, short interest on CHK swelled by 10.2% during the past month, and these bearish bets now account for a healthy 6.6% of the security's float.

Given the stock's technical troubles, it's no surprise that bearish sentiment is gaining traction on CHK. The shares have shed more than 19% year-to-date, and CHK is staring up at resistance from its 10-week, 20-week, and 40-week moving averages.

Weekly Chart of CHK since September 2009 With 10-Week, 20-Week, and 40-Week Moving Averages

If round-number support at the $20 level should give way under the weight of these descending trendlines, it could attract a fresh wave of bears to the stock -- potentially exacerbating the equity's decline.

Clean Energy Fuels Corp.

CLNE was targeted by call buyers on Wednesday, according to data from the ISE. During the course of the session, speculators on this exchange bought to open 1,385 calls on CLNE, compared to just 13 puts. The equity's single-day ISE call/put volume ratio of 106.54 underscores a strong bias toward bullish bets over their bearish counterparts.

However, the day's onslaught of optimistic option volume was simply more of the same for CLNE. The stock has racked up a 10-day ISE call/put volume ratio of 24.12, as more than two dozen calls have been purchased for every put during the past two weeks. This ratio ranks higher than 98.7% of comparable readings taken during the previous year, revealing that speculators have shown a greater appetite for calls over puts less than 2% of the time.

The equity's SOIR of 0.45, meanwhile, reveals that calls more than double puts among options set to expire within three months. This ratio stands in just the fourth annual percentile, as short-term speculators have been more optimistically aligned only 4% of the time during the past year.

Calls are dominating today's option activity in CLNE, too, with volume surging to five times the norm at last check. Roughly 6,200 calls have traded so far, and it looks like new contracts are being added at the October 18 strike.

However, it's worth noting that short interest on CLNE jumped by nearly 21% during the past month, and increased by 3.3% during just the most recent reporting period. Now, these pessimistic positions represent a hefty 24.5% of the stock's float.

With short interest and buy-to-open call volume rising simultaneously, it's quite possible that the apparently bullish option activity is actually just a byproduct of increased hedging by the shorts. By purchasing calls on CLNE, short sellers can limit their upside risk for a relatively minimal upfront expense.

The shorts don't need to panic just yet, though. CLNE has found solid support at the $14 level in 2010, but resistance from the stock's 80-day and 120-day moving averages is looming overhead. During the short term, these troublesome trendlines could continue to thwart CLNE's rally attempts.

Daily Chart of CLNE since March 2010 With 80-Day and 120-Day Moving Averages

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This article appears in: Investing , Options

Referenced Stocks: CHK , CLNE

Schaeffer's Investment Research

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