Gap stock rose 5.6% to $21.29 ahead of Gap Inc’s second-quarter earnings report, as traders piled into options before the close on Thursday, Aug. 27. The move left the shares close to their 80-day moving average even after a 17% slide this year.
The interest was not subtle. So far today, 21,000 calls and 14,000 puts have changed hands, about six times the usual intraday options volume, with the weekly 9/4 21-strike put the most active contract. The September 24 and 22 calls were not far behind, and new positions were opening at the September 22 calls.
Analysts surveyed by Zacks Research expect earnings of 50 cents per share on revenue of $3.72 billion. That would mark a 12.3% year-over-year decline in earnings, while revenue is also expected to edge lower from a year ago. The setup explains why the stock is drawing so much attention today: the numbers are due after the close, and traders want to be positioned before they arrive.
The options market is pricing in a 17.7% move after the report, no matter which way the stock goes. That is larger than Gap’s average reaction of 11.6% over the last eight quarters, but the past also cuts against easy confidence. The shares finished higher after four of those eight reports, yet the two most recent reactions were negative, including a 15.4% drop in late May.
There is still another layer underneath the trading. Short interest amounts to 13.3% of GAP’s available float, leaving room for a sharper move if the report lands well. The stock also has nearly four days’ worth of potential buying power if the reaction is positive, which helps explain why the name is attracting both call buyers and put buyers at the same time.
What happens next is straightforward: Gap Inc. reports after the close on Thursday, and the market will decide whether the stock’s 5.6% advance was a warm-up or a warning. Until then, the gap stock trade is being driven less by conviction about the quarter than by the size of the move traders think may follow it.
