Options Traders Aren't Buying Gap Stock's Spin-Off Surge

GPS has broken out above a pair of key trendlines

Managing Editor
Mar 1, 2019 at 10:43 AM
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The shares of Gap Inc (NYSE:GPS) are up nearly 17% at $29.68 in this morning's trading, pacing toward their biggest one-day gain since Nov. 21, 2008, when they popped 27.2%. The surge comes after the company reported a fourth-quarter earnings beat -- though revenue fell slightly short of the consensus estimate -- and revealed plans to spin off its Old Navy business. 

This is part of the retailer's broader rebranding initiative, which also includes plans to close 230 Gap stores -- and follows a 5% drop in global same-store sales last year. Gap, Athleta, Banana Republic, Intermix, and Hill City will continue to operate under a singular umbrella company, which has yet to be named. Chairman of the Board Robert Fisher said the move was necessary because "each company now requires a different strategy to thrive moving forward."

GPS had been in a long-term downtrend heading into today's trading, with rebound attempts continually failing at the stock's 50-day and 80-day moving averages since a late-August bear gap. However, the stock has sliced through both of these trendlines today, and is pacing toward its highest close since Sept. 5.

Digging deeper, Gap stock has Schaeffer's put/call open interest ratio (SOIR) of 2.33 lands in the 93rd percentile of its annual range. This suggests that near-term options traders are more put-biased than usual right now, with the equity's March 26 put currently home to peak open interest of 17,057 contracts.

And today, amid accelerated options activity -- 45,000 contracts have traded already, 23 times what's typically seen -- speculators appear to be initiating new put spreads at the April 25 and 28 strikes. Trade-Alert suggests this is activity reflects traders' expectations that GPS will retreat back to $25 by April options expiration.

Ahead of today's news, analysts were wary toward the retailer. As of last night's close, 13 of the 15 following brokerage firms carried a "hold," "sell," or "strong sell" rating. This morning, however, no fewer than five brokerages have lifted their price targets, with Telsey Advisory being the most generous, handing out a hike to $40 from $34 -- a 35% premium to Gap's current price.

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