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Gap Puts Pop As Earnings Loom

Patrick Martin

It's been a rough stretch for the retail sector, with the SPDR S&P Retail ETF (XRT) logging a 25.4% year-over-year deficit, last seen at $39.16. Plus, looking at an internal scorecard compiled by Schaeffer's Senior Quantitative Analyst Rocky White, only 34% of the 85 stocks we track under the "general retailers" umbrella were above their 80-day moving average heading into today.

However, blowout corporate reports from the likes of Target (TGT) and Lowe's (LOW) have lifted retail stocks across the board today. Looking to keep this momentum going will be Gap Inc (NYSE:GPS), with the retailer ready to step into the earnings confessional tomorrow.

Daily ETF Chart XRT

Gap will report second-quarter earnings after the close tomorrow, Aug. 22. Looking at its earnings history, the stock has closed lower the day after earnings in four of the past eight quarters, including a 9.3% drop in May. Over the past two years, the shares have swung an average of 8.5% the day after earnings, regardless of direction. This time around, the options market is pricing in a much larger-than-usual 17.8% swing for Friday's trading. 

As far as options, the stock's Schaeffer's put/call open interest ratio (SOIR) of 4.71 ranks in the 98th percentile of its annual range. Not only does this show that put open interest heavily outweighs call open interest among options expiring within three months, but such a put-skew among near-term traders is very rare. Underscoring this is GPS' total put open interest of 148,812 contracts, an annual high. 

Shifting gears to today, puts remain popular. At last check, almost 9,400 puts have crossed the tape, three times the average intraday amount. Leading the charge is the weekly 8/23 15.50-strike put, where new positions are being opened.

Given GPS' current perch at $16.80 -- up 3.9% thanks to today's halo lift -- buyers of these puts expect a sharp pullback from the stock by the time the options expire this Friday. Sellers, meanwhile, either expect $15.50 to serve as a short-term foothold, or are looking to profit on a post-earnings volatility crush.

On the charts, Gap stock nabbed a nearly eight-year low of $15.22 on Aug. 15. Year-to-date, the shares are down almost 35%, with breakouts thwarted by their descending 60-day moving average. As such, there isn't much optimism to be found around the security; the majority of analysts rate it a "hold" or worse, and 13.5% of its total available float is sold short.

Daily Stock Chart GPS