Volatility Says CHK on the Brink of Breakout

While many are quick to point out the prominent position which volatility analysis should hold in an option trading investor's bag of tricks, stock traders can also benefit from an increased understanding of volatility. Over time stock prices alternate from periods of compressed volatility to periods of expanding volatility. Understanding that compressions don't continue in perpetuity, but rather give rise to some type of expansion can aid in identifying strategic entries for not only long volatility strategies, but also directional plays. This is a common approach used by breakout traders as they seek stocks in the midst of consolidation that are on the verge of breaking out. Consider the recent activity in Chesapeake Energy Corp. (NYSE: CHK ) for instance. The consolidation experienced through much of the last month is merely a compression in volatility, a coiled spring of sorts, which may serve as a precursor to a breakout. Traders seeking bullish exposure in the energy space may consider purchasing call options on CHK when it breaks out. For a short term speculative play I suggest buying the CHK May 34 or 35 Call options. At the time of this writing Tyler Craig owned long call options on CHK. Follow Tyler Craig on Twitter@TylersTrading .
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