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Put volume ramped up on The Gap Inc. (NYSE:GPS) yesterday, as approximately 22,000 contracts crossed the tape throughout the session. This was more than five times the norm, and 10 times the number of calls exchanged. However, taking a closer look at the data reveals that the bulk of yesterday's put activity was of the neutral-to-bullish variety.
To be more specific, nearly 20,500 puts changed hands at the October 40 strike on Monday -- most of them in one large block near the bid price for $0.60 apiece. Meanwhile, open interest skyrocketed by 20,289 contracts overnight, confirming the initiation of new positions. In other words, it appears these puts were sold to open by a single speculator.
According to data from Trade-Alert, this activity is likely linked to a similarly sized block of sold-to-open September 40-strike puts that expired worthless last Friday. In this new scenario, the trader is betting on GPS to remain north of the $40 mark through the close on Oct. 18. Again, this would render the options worthless, and allow him to pocket the initial premium received from his put sales.
As of this morning, the delta for this put is docked at negative 0.37, implying it has a 37% chance of moving into the money during its lifetime. Should this come to fruition, the seller could find himself obligated to purchase the shares at $40 each, no matter how far GPS falls between now and front-month expiration.
Examining The Gap Inc.'s (NYSE:GPS) technical backdrop shows that the retailer has had a solid 2013 for the most part, gaining more than 31% year-to-date. However, the stock has been struggling to recover from its August downturn, and has trailed the broader S&P 500 Index (SPX) by roughly 11 percentage points during the past two months. At last check, the shares are off 0.7% to hover at $40.92.
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