Gap (NYSE:GPS) shares are up more than 8% in early trading after the retailer once again reporting monthly same-store sales that topped analysts’ expectations. Overall, sales at stores open at least a year rose 4% in February, compared to the 1.4% decline expected by analysts.
The sweet spot for the San Francisco-based company was the Banana Republic brand, where sales grew by 12%, more than doubling estimates. Old Navy saw a 5% improvement in sales, while the flagship Gap brand saw sales edge 1% higher for the month. This was Gap’s first month of same-store sales growth since April 2011, according to Briefing.com.
Last month, Gap officials said January sales fell 4%, which was narrower than the expected 4.9% pullback. The stock subsequently spiked 10.6% the day that report hit the Street.
Hoping for a repeat performance, option traders scooped up some short-term calls in Wednesday’s session. The March 25 call — out of the money by $1.64 (or 7%) at yesterday’s close — saw volume of roughly 13,000 contracts. Roughly half of these contracts translated into new open interest this morning.
Implied volatility shifted higher on the retailer’s options, suggesting that buyers were holding the reins. This call has increased 67 cents today to 80 cents amid the stock’s strong rally. The 25 strike is now in-the-money, and delta has risen to 57%, suggesting an improving chance that the calls will expire in-the-money two weeks from tomorrow.
We are seeing some heavy trading at this strike once again as traders may be exiting from this position after realizing a solid one-day profit. If they bought the calls around, for example, 15 cents per share and can close them at the current bid price of 76 cents, that’s a 400% profit in less than 24 hours (before commissions) — not bad for a day’s work!
Of course, had Gap failed to deliver a positive sales surprise, these calls may have quickly become virtually worthless — and these plucky traders would be sitting with a 100% loss. A long call has unlimited upside through expiration as long as the underlying stock is moving higher. Losses, meanwhile, are capped at 100% of the amount paid for the option.
If in fact yesterday’s options activity was driven by call buyers, it was a risky short-term bet made by some traders who were confident ahead of the retailer’s same-store sales report. In this scenario, it looks like the wager paid off, but next time maybe it won’t. Never commit more to an option (particularly an aggressive play such as this one) than you are comfortable losing.
As of this writing, Beth Gaston Moon does not own any shares mentioned here.
