Is There a Bullish Case to Be Made for Gap Inc (GPS)?

Gap Inc (GPS) is in oversold territory, and options traders see further losses ahead

by Alex Eppstein

Published on Apr 26, 2016 at 11:08 AM
Updated on Jun 24, 2020 at 10:16 AM

Apparel retailer Gap Inc (NYSE:GPS) has been bombarded by bears in the options pits and beyond. There's a reason for that, of course -- the stock has taken a beating on the charts. At last check, GPS was down 0.3% at $23.34, bringing its year-over-year deficit to about 42%. As a result, the stock's 14-day Relative Strength Index (RSI) checks in at 27.39 -- in oversold territory, suggesting the shares could be ready to take a bounce.

As alluded to, pessimism among options traders is high. According to data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), speculators have bought to open 4.50 GPS puts for each call during the past 10 trading days. The resultant put/call volume ratio ranks in the bearishly skewed 81st annual percentile. Further highlighting the prevailing put-skew, the stock's Schaeffer's put/call open interest ratio (SOIR) of 1.76 sits in the top one-third of all readings recorded in the past year.

It's more of the same elsewhere. Roughly 86% of the analysts tracking GPS consider it a "hold" or worse. What's more, short interest spiked 11.6% during the latest reporting period to 37.5 million shares -- the fourth-highest total in the last seven years. At the stock's average daily trading levels, it would take over seven sessions to cover these bets.

In terms of Gap Inc's (NYSE:GPS) future prospects, it's hard to be convinced that the stock will recover, given its brutal technical track record and consistently disappointing same-store sales results. However, if it's foray into oversold territory can spark some buying activity, an unwinding of the pent-up negativity could lead to outsized gains.

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