Trade Alert: Filling The Gap (GPS)

By Jim Pearce • July 27, 2018

The retail sector has been on a roll lately, but you couldn’t tell by looking at a price chart for The Gap (NYSE: GPS). Despite its propitious trading symbol, GPS has been having trouble finding its way this year.

Two months ago, GPS dropped more than 10% in a single day after releasing Q1 results that fell short of analysts’ expectations. Since then, its share price has gradually recovered but is still in the red for 2018.

That type of volatility tends to drive up options prices, as reflected in the implied volatility of The Gap’s options expiring in two months. That’s because the company is scheduled to release its Q2 earnings on August 23, and everyone remembers what happened last time.

However, uncertainty over its near-term results allows us to sell a slightly out-of-the-money put option on The Gap at a 5% premium for only an eight-week holding period. That works out to more than 30% on an annualized basis.

Quite frankly, it wouldn’t bother me if this stock was put to us since the call options are trading at the same level of premium. I will gladly accept a 5% option premium every eight weeks for as long as someone is willing to give it to me.

To be clear, I don’t expect that to happen. The Gap’s above-average IDEAL score of 7 and its neutral but firming technical indicators suggest sideways to slightly upward movement in the weeks to come.

Regardless of how many contracts you sell, it’s absolutely critical that you follow the instructions below, particularly when it comes to setting the limit order.

How to Make the Trade:

Trade: Sell to open the September 21, 2018, $30 put option on The Gap (NYSE: GPS).
Symbol: GPS180921P00030000

Allocation: Sell one put for every 100 shares of The Gap you would be pleased to buy at $30 per share. Investors should set aside $3,000 per contract sold to buy the stock in case the option expires in the money.

Prices:
- Current Stock Price: $30.15
- Limit Order Price: a credit of $1.50 or more.
- Tell your broker: “I want to sell a put on The Gap stock. Specifically, I want to ‘sell to open’ one September $30 Put for a credit of $1.50 per share or more.”

Further Instructions Regarding the Trade:
- If the option price changes, you can adjust our recommended limit based on the midpoint of the bid/ask spread, which you should be able to see when entering the trade. Just make sure the potential credit is at least equal to the Limit Order Price specified above.
- Place your limit order on a “good ’til canceled” (GTC) basis and be patient.

Stock Talk

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Victor

07/27/18 ‐ 10:20am ET July 27, 2018 at 10:20am ET

Filled @ 1.70 on Ally

Glenn

07/27/18 ‐ 10:37am ET July 27, 2018 at 10:37am ET

Filled at $1.74.

Claude

07/27/18 ‐ 11:02am ET July 27, 2018 at 11:02am ET

Filled @ 1.87

Jeff L.

07/27/18 ‐ 11:23am ET July 27, 2018 at 11:23am ET

Sell to open put strike $30 filled $1.85 TOS thank you…

Carl

07/27/18 ‐ 11:25am ET July 27, 2018 at 11:25am ET

Filled on TOS @ $1.80
Thank You Jim

Derek: Las Vegas, NV

07/27/18 ‐ 11:35am ET July 27, 2018 at 11:35am ET

Reduced the strike price to a $29.00 put, filled at $1.42. This will give me a lower break-even price and a better entry price if assigned.

Derek

JoeJB

07/27/18 ‐ 11:42am ET July 27, 2018 at 11:42am ET

Filled @ $1.86 on Fidelity

George McMillion

07/27/18 ‐ 11:43am ET July 27, 2018 at 11:43am ET

Filled at $1.88 Credit on TOS

Thanks Jim

Ian

07/27/18 ‐ 12:04pm ET July 27, 2018 at 12:04pm ET

GPS Sep 21 ’18 $30 Put Executed @ $1.88 etrade

Mark F

07/27/18 ‐ 12:23pm ET July 27, 2018 at 12:23pm ET

GPS filled @ 1.90

Daniel Long

07/27/18 ‐ 12:55pm ET July 27, 2018 at 12:55pm ET

GPS STO Sep 21 P 30 $1.91 credit at Fidelity.
DL

Maria R

07/27/18 ‐ 2:28pm ET July 27, 2018 at 2:28pm ET

Have GPS. decided to do put @ $29 strike. Filled 1.43 cr. If assigned, will add to my position

Michael E

07/27/18 ‐ 3:02pm ET July 27, 2018 at 3:02pm ET

GPS Filled @ $1.96
Fidelity

Eistha

07/27/18 ‐ 3:46pm ET July 27, 2018 at 3:46pm ET

Filled @ 1.96 TOS

Dave NYC

07/27/18 ‐ 3:48pm ET July 27, 2018 at 3:48pm ET

Filled @ $1.96

Stanley

07/30/18 ‐ 10:24am ET July 30, 2018 at 10:24am ET

GPS filled for 1.72

ETKTRIDE

08/01/18 ‐ 6:15pm ET August 1, 2018 at 6:15pm ET

GPS – filled @ $2.00 CR (IB)

Jim Pearce

08/24/18 ‐ 8:54am ET August 24, 2018 at 8:54am ET

The Gap released Q2 earnings last night that beat on earnings and revenue but included a drop in same-store sales for its flagship brand: https://finance.yahoo.com/news/gaps-namesake-brand-posts-disappointing-214654195.html. As a result, the stock is trading below our $30 strike price in pre-market trading this morning. The lower Bollinger Band for GPS is at $29, so if it closes about that price today then I expect it will level off over the next week and then gradually work its way above $30 before expiration.

Stanley

09/18/18 ‐ 8:53am ET September 18, 2018 at 8:53am ET

GPS 60% of my holding was exercised last night.
Debating whether to hold shares

Jim Pearce

09/18/18 ‐ 10:18am ET September 18, 2018 at 10:18am ET

One reason why I use my IDEAL Stock Rating System to identify short put candidates is in case we end up owning the stock. If a stock scores highly according to my system, that means it is undervalued relative to the rest of the market and should appreciate in the intermediate to long term. Of course, from a short-term perspective my timing isn’t always perfect as evidenced by this trade. However, I will happily hold onto GPS and write a covered call against it at the same strike price as we bought once it rallies a bit so our option premiums (and any dividends received) are all gain. I will write more about that in this week’s update.

Stanley

09/18/18 ‐ 12:52pm ET September 18, 2018 at 12:52pm ET

Thank you

Draco Visor

09/19/18 ‐ 10:00am ET September 19, 2018 at 10:00am ET

Jim,

I understand your system, and I’m not trying to rock the boat here, but I am concerned about GPS. I do not have the available capital to have GPS PUT to me this Friday, as our BBBY trade didn’t work out as planned, and that ate up a lot of my cash. While you are fine with owning GPS shares, and eventually writing a call option, I can’t this week. Can you offer any guidance to roll this trade ahead a few weeks/months?

Jim Pearce

09/19/18 ‐ 1:21pm ET September 19, 2018 at 1:21pm ET

You can buy the put back (as George did below) and close it out altogether. Or, you can sell a covered call on BBBY that expires on 9/28 (next Friday) at the $19 strike price. That will free up capital to pay for the GPS shares put to you this week. That option has a bid of over a dollar today, meaning you would make a small net profit on it since we bought it at $20. That way, you can hold GPS until a profitable covered call can be written against it.

George McMillion

09/19/18 ‐ 11:47am ET September 19, 2018 at 11:47am ET

I closed GPS yesterday at $2.58 Debit so ended up with a small loss. Fully expect some losers and way ahead with all the Wealth Society trades.

Thanks Jim

Jim Pearce

03/01/19 ‐ 1:03pm ET March 1, 2019 at 1:03pm ET

[3/1/2019] As I mentioned in this morning’s Update (https://www.investingdaily.com/articles/46873/final-guidance-for-income-millionaire-portfolio/), GPS jumped 25% last night and has held most of that gain through the middle of today. However, the options market doesn’t seem to believe that it will go up much further. At 1 p.m. today, the $28 strike price expiring on June 21 had a bid of $3.40 for net sale proceeds of $31.40. That’s less than 5% higher than its current share price of $30.08 and only slightly above today’s high price (thus far) of $31.39. So, you can either sell GPS now for a slight gain or write the covered call for what might be another 4 – 5% (plus the next dividend payment) if you expect it to remain above $28 over the next four months.

Maria R

03/01/19 ‐ 1:27pm ET March 1, 2019 at 1:27pm ET

Thank you. Will miss you. I really like especially the follow up you do on your trades: you do not leave us hanging. Glad you are still in PF

Daniel Long

03/04/19 ‐ 9:51am ET March 4, 2019 at 9:51am ET

Jim,
GPS becomes two companies. I assume this was done to unlock shareholder value, among other reasons. Therefore, wouldn’t it be wise to hold until the split occurs? And what do you think about the long term value of each company?
It would be nice if there was periodic follow-up, especially sell advice, on the companies in the portfolio. The newsletters are professional investing advice, and should be that way for both the buy and the sell sides. I own a number of stocks from the three expiring newsletters, and I very much value the exit advice they gave. I feel like I am being set adrift in a row boat without a chart. I cannot possibly match the insight and expertise you and your analysts have, and without your guidance, a successful position could turn into a loss. What can be done? Thanks.
DL

Jim Pearce

03/04/19 ‐ 4:14pm ET March 4, 2019 at 4:14pm ET

I will provide ongoing comments and guidance through the April expiration date of the three remaining short put positions, and available to respond to Stock Talk questions until the site is taken down at the end of April.

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