Clothing retailer The Gap (GPS) has outperformed the market this year, with a 30 percent gain. One trader sees shares pulling back in the next few weeks.
That’s based on the October 20 $10.50 puts. With 17 days until expiration, 16,663 contracts traded compared to a prior open interest of 432, for a 39-fold rise in volume on the trade. The buyer of the puts paid $0.50 to make the bearish be
Shares recently traded at about $10.50, so the stock would need to drop about 5 percent for the put options to move in-the-money. That strike price is still well over the stock’s 52-week low of $7.22 per share.
Given the rally in Gap shares, even as the company lost money and saw revenues drop by 8 percent, betting on further downside in the weeks and months ahead looks like a reasonable bet.
Action to take: Investors should hold off for a few weeks and let the current market volatility play out, as shares could potentially drop lower quickly in the next month. Shares yield about 5.8 percent at current prices, but the payout far exceeds earnings, so a dividend cut could be on the way.
For traders, the $10 puts look like an inexpensive way to play today’s volatile markets in the coming weeks. There’s a good chance the options move in-the-money, and traders could see high double-digit gains in the months ahead.
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 of the companies mentioned in this article.