IB Options Brief: Chesapeake Energy Corp. (CHK), Flowserve Corp. (FLS) & CBS Corp. (CBS)

Posted May 2nd, 2012 by Caitlin Duffy in Unusual Activity

Bears Crowd Chesapeake Weekly Puts As Shares Slide - Todayís tickers: CHK, FLS & CBS

CHK - Chesapeake Energy Corp.
Traders positioning for shares in the second-largest U.S. natural gas driller to potentially drop to lows not seen in years are snapping up weekly put options this morning. The stock is down more than 13.2% at $17.00 as of 11:00 am ET after Chesapeake Energy Corp. reported a surprise loss in the first quarter amid continued concern and uncertainty surrounding actions of the Companyís CEO.

Bearish interest is notable in the May 04 í12 $16 strike puts, with more than 5,100 of those contracts purchased earlier in the session for an average premium of $0.10 apiece. Put buyers may turn a quick profit if shares in Chesapeake decline another 6.5% to breach the breakeven price of $15.90 by expiration. Weekly put buyers acting ahead of the earnings report appear to have done well for themselves, with the May 04 í12 $19 strike puts purchased around 4,800 times on Tuesday for an average premium of $0.33 apiece. Less than 24 hours later, those same $19 strike put options are six times as expensive, trading at $1.97 per contract on Wednesday morning.

FLS - Flowserve Corp.
Shares in the provider of pump systems and control valves are up sharply on Wednesday morning, trading up 4.0% at $118.06 as of 11:15 am in New York. The stock slipped slightly earlier in the week following the Companyís first-quarter earnings report, but have more than made up for that pullback today. Flowserve appeared on our ëhot by options volumeí market scanner in the first hour of the session after one strategist initiated a sizable put spread in the June expiry.

It looks like the trader purchased a 1,500-lot June $95/$105 spread for a net premium of $0.85 apiece. The put spread may represent downside protection for an investor seeking to hedge a long position in the underlying shares, or could be an outright bearish play looking for the stock to drop substantially in the next seven weeks. Profits, or downside protection, are available on the spread should shares in Flowserve Corp. plunge 11.8% to breach the effective breakeven price of $104.15, while maximum potential profits of $9.15 requires shares fall nearly 20.0% to $95.00 by June expiration. Shares in Flowserve last traded below $95.00 back in November. The stock is up better than 15.0% year to date.

CBS - CBS Corp.
The mass media companyís shares rallied as much as 4.7% to a near five-year high of $35.00 Wednesday on the heels of better-than-expected first-quarter earnings reported after the final bell on Tuesday. Shares in CBS Corp. are currently up 3.65% at $34.64, bucking broader market declines today. In-the-money call selling in the front month this morning may represent profit taking in the aftermath of the strong earnings report.

Open interest in the May $34 strike calls suggests around 4,000 calls had been purchased the morning of April 19th for a premium of $0.70 apiece. The subsequent share price appreciation helped drive premium on the contracts up substantially in the past couple of weeks. It looks like approximately 4,000 off the $34 strike calls were sold this morning for a premium of $1.01 each. Net profits on the transaction amount to $0.31 per contract, or gains of 44.3%.

If the buyer of the calls in April and the seller of the calls today are one and the same and if activity at the $34 strike is relatively unchanged from now through to Wednesdayís close, open interest in the May $34 strike call should drop by approximately 4,000 contracts from the current reading of 9,068 open positions. On the other hand, a roughly 4,000-lot increase in open interest overnight would change the interpretation of todayís call activity.

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