Trade Update May 14th, 2012 at 1pm: Since buying the May 27 Puts on April 30th for .44 when the stock was $28.50, the company released April same store sales that slightly disappointed the street and the stock has been down about 3%. In the same time period, the SPX has been down about 4%. With earnings due out Thursday after the close I want to take a little money off of the table, but leave my near-term bearish bet on. With the stock at 27.60 I just sold the May 26 Puts at .28. Now I am long the May 27/26 Put Spread for .16, my new trade looks like this:
GPS Long May 27/26 Put Spread for .16
Long May 27 Put for .44 (bought April 30th-below)
Short May 26 Put at .28 (sold May 14th at 12:55 pm)
Break-Even On May Expiration (Friday):
Profits btwn 26.86 and 26 make up to .86, max gain of .85 below 26
Losses of up to .16 btwn 26.86 and 27 and max loss of .16 above 27.00
Original Post Apr 30th, 2012: Stock Up 53% YTD Heading Into 2 Events in May, You May Want To “Mind the Gap”
1.Report Comparable Store Sales Thursday May 3rd Prior to the Open.
2.Report fiscal Q1 earnings on May 17th after the close.
PRICE ACTION / SENTIMENT: stock has had a massive run this year, already up 53% ytd aided by a couple of fairly large monthly sales beats in both Jan and Feb (see gaps on the chart below).
Technically it is breaking out of an 11 year range where the stock for the most part traded btwn 15 and 25. The almost 93% move in the stock seems just a tad overbought at current levels.
Even with the stocks ytd performance, many Wall Street analysts have chosen to stay on the sidelines with 10 Buys, 16 Holds and 5 Sells.
Implied vol is trading pretty close to its historical average going into 2 big events for the company. Actual vol is on the low side as the stock has made its recent march higher. (Red=implied, Blue=actual, Yellow=implied yearly avg.)
MY VIEW ON THE NAME: I am by no means a retail expert and don’t shop at the GAP so I can’t speak to their products, but I will tell you that the price action is a bit frothy. Reading through some recent research on the stock it becomes relatively apparent the company has a difficult year over year comparison for April sales as analyst estimates range from down 2 to down 5%. Oddly, expectations are not very high especially after the company has reported some massive sales beats in the prior 2 months.
The stock is trading around 18x expected fiscal 2013 earnings which is not exactly as earnings are expected to grown 21% this year, but sales growth expected to be just low single digits for the next 2 years causes lots of potential pit falls for a company who has traditionally struggled with inventory and missed some big fashion trends.
Near term there could be a bit of god news already priced in the to the stock. Obviously I don’t buy stocks like this and would only initiate a new position that benefits from a potential sell off……but we can offer some defensive structures or what we deem to be the best way to make an outright bearish bet with defined risk.
May options are interesting because there are 2 potential market moving events prior to May expiration.
2 TRADES THAT LOOK INTERESTING TO US DEPENDING UPON YOUR VIEW:
1st TRADE: GPS ($28.42) BOUGHT May 27 Puts for .44
-On any weakness after Thursday’s comps, I will look to turn into a Put Spread by selling a lower strike Put against the May 27 Puts that I own.
-If the stock does nothing or goes higher (but not too much higher) the Puts should stay decently bid as their Q1 earnings report is the day before expiration.
OR IF YOU ARE LONG AND WANT TO CONSIDER DEFINING YOUR RISK AND LOCKING IN SOME PROFITS IN FRONT OF WHAT COULD BE A VOLATILE COUPLE OF EVENTS IN THE NEXT 2 WEEKS YOU COULD CONSIDER STOCK REPLACEMENT STRATEGIES.
2nd TRADE: GPS ($28.45) Buy May 30/32 Call Spread for .30
-Buy 1 May 30 Call for .43
-Sell 1 May 32 Call at .13
Break-Even on May Expiration:
Profits btwn 30.30 and 32 make up to 1.70, max gain of 1.70 above 32 or up 13%.
Losses of up to .30 btwn 30 and 30.30, max loss of .30 below 30.00