Options Traders Target Gap Stock Ahead of Earnings

Apparel retailer Gap Inc (NYSE:GAP) is scheduled to report second-quarter earnings after the close on Thursday, Aug. 27. According to Zacks Research, analysts expect earnings of 50 cents per share on revenue of $3.72 billion. The earnings estimate represents a 12.3% year-over-year decline, while revenue is expected to edge lower from the year-ago period.

Options traders are already piling on ahead of the event. So far today, 21,000 calls and 14,000 puts have been exchanged, six times the intraday average options volume. The weekly 9/4 21-strike put is the most active contract, while the September 24 and 22 calls are close behind, with new positions opening at the latter.

The surge in options activity comes as Gap stock jumps 5.6% to trade at $21.29, enjoying sector tailwinds. The shares are looking to close above the 80-day moving average, which kept a cap on gains in May and early August. Year to date, the equity is still down 17%, however. 

Longer-term options traders have also favored calls. At the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), GAP's 50-day call/put volume ratio of 3.00 shows calls tripling puts during the past 10 weeks.

Options traders are pricing in a 17.7% post-earnings move, regardless of direction, much larger than Gap stock's average reaction of 11.6% over the last eight quarters. The shares have finished higher after four of those eight reports, though the two most recent reactions were negative, including a 15.4% drop in late May.

Notably, short interest accounts for 13.3% of GAP's available float, leaving nearly four days' worth of potential buying power, should the shares stage a positive earnings reaction.