While oil stocks like Exxon Mobil Corporation (NYSE: XOM ) are struggling to make headway in the current energy environment, natural gas companies are starting to show signs of life. According to a recent report from the U.S. Energy Information Administration (EIA), the glut in natural gas supplies is starting to draw down, and that bodes well for natural gas prices and Chesapeake Energy Corporation (NYSE: CHK ).
Per the EIA , natural gas stocks rose by a less-than-expected 46 billion cubic feet in the most recent week, missing analysts expectations for a rise of 52 billion cubic feet and arriving well below the five-year average of 72 billion cubic feet.
While the latest report is far from indicating a full correction in the natural gas industry, it is a step in the right direction. Furthermore, with President Trump pushing for higher U.S. natural gas exports to Europe and China, there could be additional market pricing support on the way.
Click to Enlarge As for Chesapeake Energy, CHK stock is already signaling a potential rebound. The stock hit near oversold levels last week after bottoming near $4.38 and has since rallied back more than 13%, with the EIA's report providing an added boost.
The shares have reclaimed both their 10-day and 20-day moving averages, and only the 50-day remains overhead to create any significant short-term issues. That said, the 50-day trendline rests near $5.21, leaving room for CHK to run before hitting resistance.
Turning toward Chesapeake Energy's sentiment backdrop, there is a wealth of negativity levied against the shares. For instance, Thomson/First Call reports 27 of the 34 analysts following the shares rate them a "hold" or worse.
Meanwhile, the 12-month price target has dropped to $6.34 from $6.94 in less than a month's time. In other words, if CHK can make some headway following a rise in natural gas prices, we could see an upgrade or two provide additional lift for the shares.
Short interest is also a potential factor in a CHK rebound. As of the most recent reporting period, the number of CHK shares sold short rose 15% to 192 million, or 21.8% of the stock's total float. With the shares up 13% last week and looking to reclaim the $5 region, we could see the weak hands shaken out, providing a covering rally for CHK stock.
Looking at CHK's options backdrop, many of these short sellers might be worried about a short-squeeze situation. Currently, CHK's July put/call open interest ratio stands at 0.57, with calls nearly doubling puts among options set to expire within the next month.
Overall, July implieds are pricing in a potential move of about 8.8% for CHK stock over the next month. This places the upper bound at $5.44, while the lower bound lies at $4.56.
2 Trades for CHK Stock
Call Spread: Traders looking to take advantage of a short-term rebound for CHK stock might want to consider a July $5/$5.50 bull call spread. At last check, this spread was offered at 17 cents, or $17 per pair of contracts. Breakeven lies at $5.17, while a maximum profit of 33 cents, or $33 per pair of contracts, is possible if CHK closes at or above $5.50 when July options expire.
Put Sell: Alternately, if you're looking for a more conservative play on CHK stock, a July $4.50 put sell has a good chance at finishing out of the money. At last check, this option was bid at 8 cents, or $8 per contract. As usual with a put sell, you keep the premium as long as CHK stock closes above $4.50 when July options expire. On the downside, if CHK trades below $4.50 prior to expiration, you could be assigned 100 shares for each put sold at a cost of $4.50 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.