Weekend Investing Observations – August 10: Chesapeake and others

The Wall Street Journal had a piece alerting readers to the comparative lack of third party accounting verification of the wells of Chesapeake Energy (CHK).   Barron’s wrote favorably about the prospect for Sears (SHLD), Gamestop (GME) and even Best Buy (BBY).

Outside of my lightly held opinions about the merits of these positions I think they are all classic cases where there is a very binary outcome that the long term options market is likely mispricing.  GME & BBY are obscured by takeover possibilities so the long term premium is more in jeopardy.

CHK: 19.68.  January 2014 20 call is asked $4.5; 30 strike is $1.55.  puts  @ 20 are 5.25, and @10 1.42 (put @8 is $1.01).

SHLD: 51.4, you can go to June 2014.  60 call @ 9.6 ask (6.6 bid-huge spread), 40 put: 14.10.   Browsing other options the January 2014 17.5 put looks compelling at 3.

Option premiums assume a normal distribution and also with LEAPs don’t assume increased volatility over time.

CHK is the interesting play, having bounced up from 12 recently though off Friday on word of a Department of Justice probe into Michigan land sales.  They have had quite a ride over the years:

 Chart for Chesapeake Energy Corporation (CHK)

Forbes did an extensive cover story on Aubrey McClendon and CHK last year.

Hours of extensive googling and bleared-eyed reading about accounting of natural gas wells later I’ve decided I don’t know enough to make a play here — nor have the fortitude to learn more when other investigations call.  But I will watch the spread between CHK and Natural Gas (off a little Sunday night); if ever there was a case of too much leverage this is probably it so my inclination is to be short.

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