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The Gap Bounces on Bullish Endorsement

Story suggests that GPS has positioned itself for great 2012

by 12/27/2011 12:00:27 PM
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This past Saturday, The Gap, Inc. (GPS - 18.90) was featured a Barron's article that attempted to answer the question (and the story's title): "Can The Gap Come Back?" The author suggests that GPS' few poor decisions -- including purchasing cotton at near-high prices this year -- could all be erased as the clothier revamps its increasingly passť image, and listens to its investors. While GPS vies for a chunk of the Chinese market, increases its online presence, and refocuses it operations in the U.S., the writer thinks that the San Francisco-based company has taken the necessary steps to improve its significance in the fashion retail sector during 2012.

Thanks to this article, GPS is enjoying a more than 1.5% increase today, eating into its 13.3% year-to-date deficit. Currently, the shares are trading above support at the $18 level, which has contained all but one of the stock's weekly closes throughout the past nine weeks.


Despite falling 10.6% during the most recent reporting period, short interest still makes up 7.1% of the security's available float. In fact, at GPS' typical pace of trading, it would take four sessions to buy back all of these bearish bets.

Even options traders are bearish toward the equity. During the past two weeks, speculators on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open 3.85 puts for every call on GPS. This ratio arrives seven percentage points away from a pessimistic peak, signaling that traders on these exchanges have rarely purchased puts over calls at a faster pace during the past year.

The brokerage bunch is teeming with negativity toward the stock. According to Zacks, 82% of analysts have doled out a "hold" or worse rating for GPS. Moreover, the average 12-month price target -- as calculated by Thomson Reuters -- rests at 19.91, which represents a very slight premium to today's intraday high of $18.85.

Considering all the bearish sentiment stacked against GPS, a capitulation by any of the bearish holdouts could give the stock the boost it needs to prolong its recent uptrend.


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