Chesapeake Energy (CHK, $22.32, up $1.85) is rebounding this morning following this month’s sell-off. There are numerous factors that have brought the stock down from $35 to a low of $11.99 but investors seem to be building positions in hopes of a recovery.

One of the biggest reasons for the decline is the fact that the company’s CEO (and largest shareholder) was forced to sell most of his 5% stake in the company after a margin call. For those of you who don’t know what a margin call is, it’s something you don’t ever want to have happen to you. Basically, it is when you buy stock with borrowed money and are “forced” to liquidate your position because the stock is going lower.

Chesapeake is the nation’s largest natural gas producer and because it’s stock price is considered “low” there are already takeover talks swirling. There is also concern that the company could have trouble getting financed although it does have $1.5 billion in cash. Chesapeake did secure a new $450 million line of bank credit and is seeking up to $750 million to stay cash flow positive.

The company plans on maintaining its aggressive drilling plan which I think is a good idea and it wouldn’t mortgage its future without a plan. Chesapeake has a 52-week high of $74. I don’t think the stock is going to zoom back that high any time soon but I do think it could get back to the $24-$27 range over the near-term.

The November 25 calls (CHKKE, $2.10, up $0.55) are up 35% today and opened at $2.05. The low has been $1.80. I think they have a shot at trading up to $3 before the options expire which would be another 50% gain from current levels. The November options expire November 21.

For those of you who want to go further out, check out the January 25 calls (CHKAE, $3.70, up $0.90) which do not expire until January 16, 2009.

The options are a little expensive because of the volatility but these are short-term plays designed to take advantage of a rebound.

Rick Rouse
Rick@OptionsMentoring.com

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