Gap Stock Downgrade Sparks Heavy Options Trading

Options traders are eyeing Gap's earnings, too

Oct 18, 2018 at 2:54 PM
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Gap Inc (NYSE:GPS) is trading near the bottom of the S&P 500 Index (SPX) today, down 6.1% at $25.46, and fresh off a 13-month low of $25.34. The sell-off was sparked by a bear note at J.P. Morgan Securities, which downgraded GPS stock to "underweight" from "neutral," and slashed its price target by $6 to $24 -- the lowest on Wall Street.

More specifically, the brokerage firm expressed concern over a number of factors that could pressure margins, including promotions and wage hikes, and said it expects third-quarter same-store sales to fall 6% -- well below the average analyst estimate of a 0.5% decline. Gap is expected to report earnings in mid-November.

Today's sharp downside move has sparked a wave of activity in Gap's options pits, with more than 11,000 puts and 7,400 calls on the tape -- three times what's typically seen at this point in the day. The weekly 11/23 24-strike put is most active due to a 5,000-contract block that crossed earlier for 73 cents apiece. If the put trader is buying, breakeven at the close on Friday, Nov. 23, when the options expire, is $23.27 (strike less premium paid).

Widening the scope, short-term options traders are more call-skewed than usual. The security's Schaeffer's put/call open interest ratio (SOIR) of 0.99 ranks in the 25th annual percentile. This setup could create stiffer headwinds for Gap in the near term, as the hedges related to these bets begin to unwind.

Looking closer at the charts, today's negative price action is nothing new for the stock. Gap has surrendered 25% year-to-date, and is pacing for its third straight weekly loss. Underscoring this technical weakness, GPS is on track to close below its 160-week moving average for the first time since last November.

gap stock daily chart oct 18


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