With so much action going on in the market at these levels…

Traders have been looking for ways to make money…

As well as answers to why some stocks have experienced wacky price action.

After Chesapeake Energy Corporation (CHK) made a large move yesterday and finished the day up 181.94% at $69.92…

And opened at $34 this morning…

Readers were trying to figure out what caused the move and were wondering if the “smart money” was in the trade.

I want to reveal to you the details of this wild action in CHK… 

And how one options player was up $6M on CHK at one point.

 

[Revealed] Why CHK Made Some Crazy Moves Over The Last 2 Days

 

If I told you back in April, CHK was trading under a quarter…

You probably wouldn’t believe me.

Well, the truth is CHK was actually trading under a dime before it conducted its reverse split.

If you don’t know what a reverse split is…

To me, it’s simple… I’ll explain how reverse splits work shortly.

But first, I want to show you why companies conduct reverse splits.

 

Financial Engineering At Its Finest

 

A lot of the time, companies conduct reverse splits to regain compliance with exchanges.

You see, there are specific requirements to be listed on the New York Stock Exchange (NYSE) and Nasdaq. If a company doesn’t meet all the requirements…

They run the risk of being delisted.

This was what CHK was facing after the plunge in oil prices.

At the time, in order to gain compliance with the NYSE (the exchange CHK is listed on)…

It would need its shares to 10X to regain compliance.

Pretty difficult when there was so much negative news then.

So what do companies do when they run the risk of delisting?

Financially engineer their stock price.

How does that work?

Well, let me explain with an example.

For CHK to regain compliance, it would need to trade above $1.

So the quickest way for that to happen is with a reverse split, which would boost its stock price virtually overnight.

However, the market capitalization remains the same.

With CHK, it conducted a 1-for-200 reverse stock split.

That meant if you held 400 shares of CHK, they would actually be 2 shares after the split.

In turn, the stock price would actually spike up, causing CHK to regain compliance.

The thing with reverse stock splits is that it actually reduces the number of floating shares, as well as outstanding shares.

That means any catalyst could send the stock flying (due to the increased demand and limited supply).

 

How One Options Player Used This To Their Advantage

 

One pattern that I’ve noticed recently is traders have been buying companies that are set to go bankrupt…

And CHK is one of those.

The thing is, the sector actually had some news the other day, as Saudi Arabia looked to increase prices for oil.

Now, ahead of that news…

There was one interesting bet I saw…

 

On Wednesday, June 3rd

An Options Player Bought 1000 CHK

July $15 Calls for $2.11

 

That meant they spent a whopping $211K in options premium. At the time of the trade, the stock was trading at $12.91. 

Not only did this player believe CHK wasn’t going bankrupt… but they thought it was going to trade higher…

Fast forward to yesterday’s trading session…

That $211K bet was worth more than $6M at one point yesterday…

 

I’m hoping that smart money player actually took profits yesterday…

Because today, news came out that CHK may have Chapter 11 bankruptcy plans.

Now, you can probably imagine how lucrative it would’ve been if you followed this player into the trade last week…

And were able to take profits yesterday.

If you want to learn how I’m able to track “smart money” activity and use it to my advantage… click here to receive a complimentary copy of Dollar Option Trader.

Find out how I use this information to my advantage here.

Author: Kyle Dennis

Straight outta college Kyle Dennis taught himself to trade, and then made over $7 million in trading profits by the time he was 28 years old. Kyle reveals how to find, track, and profit from lucrative trades for exceptional profits. Thousands of traders follow him every day to learn how to target these high probability trades.

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