Retailer The Gap (GPS) has been a runaway winner over the past year, with a 205% rally. One trader sees shares climbing even further in the next four months.
That’s based on the July $30 calls. With 116 days until expiration, 3,173 contracts traded compared to a prior open interest of 119, for a 27-fold rise in volume on the trade. The buyer of the calls paid $2.60 to make the bullish bet.
Gap shares recently traded for about $28.50. The stock needs to rally about 5.2%, or $1.50, for the option to move in-the-money. The Gap currently sits at a new 52-week high.
Even with the big rally in Gap shares over the last year, the company is reasonably valued, as the stock trades at about 20 times earnings.
Plus, the company trades at about 0.7 times its price to sales. That suggests further upside for shares, and for the momentum to continue.
Action to take: Investors may like shares here as a momentum play. At current prices, The Gap also pays a 2.2% dividend yield, and may be able to increase its dividend as earnings grow over time.
For traders, the July $30 calls look attractive here given the upside momentum in shares. Traders should look for the trend to stall out as a sign to take profits.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any company mentioned in this article.