By Jud Pyle, CFA, chief investment strategist for the Options News Network

Looking at Chesapeake Energy ( CHK), we see that more than 15,000 of the Jan 2011 5 puts have traded today. Current open interest in these put contracts was previously just 138 contracts, according to the Sidewinder report at www.onn.tv. So it is easy to determine that today's activity will likely translate as new open interest.

What is interesting about this activity is that this volume was initiated by one buyer. The puts traded for around 60 cents, meaning the investor needs the stock to close below $4.40 at January 2011 expiration for the puts to be in the money at expiration. That is a drop of almost 80% from current levels (but the stock has more than a year and a half to make the move).

Shares of CHK were up more than 4% Friday, to $20.80. There is no particular news in the name, but the stock is rallying along with the rest of the market, as well as the energy stocks, which are moving higher on the strength in oil today.

Put-buying such as what crossed the tape earlier today does not mean investors should run right out and sell all of their shares in CHK. After all, the put-buyer could be buying shares of stock one for one with the puts, expecting a gap to the upside. Or, the buyer might be using the puts to hedge against a credit default swap contract that they are short.

It is quite common that when the price of credit default swaps increase, we begin to see more activity in the longer-dated far out-of-the-money puts. In the case of CHK, the price of CDS has ticked up in the past month, ever so slightly, from a price of 6.75% to 7.20%, to ensure $10 milion of debt for one year.

Jud Pyle is the chief investment strategist for Options News Network and the portfolio manager of TheStreet.com Options Alerts. Click here for a free trial for Options Alerts. Mr. Pyle writes regularly about options investing for TheStreet.com.

Jud Pyle, CFA, is the chief investment strategist for Options News Network. Pyle started his career in finance in 1994 as a derivative analyst with SBC Warburg. After four years with Warburg, Pyle joined PEAK6 Investments, L.P., in 1998 as an equity options trader and as chief risk officer. A native of Minneapolis, Pyle received his bachelor's degree in economics and history from Colgate University in 1994. As a trader, Pyle traded on average over 5,000 contracts per day, and over 1.2 million contracts per year. He also built the stock group for all PEAK6 Investments, L.P. hedging, which currently trades on average over 5 million shares per day, and over 1 billion shares per year. Further, from 2004-06, he managed the trading and risk management for PEAK6 Investments L.P.'s lead market-maker operation on the former PCX exchange, which traded more than 10,000 contracts per day. Pyle is the "Mad About Options" resident expert. He is also a regular contributor to "Options Physics."

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