Gap Inc (NYSE: GPS) finished 7.42% higher on Monday as the stock is approaching earnings this week on August 27 after the market close. With such a bullish move ahead of an uncertain announcement, it appears that traders are looking forward to an earnings beat and upgraded guidance. Looking at the expected price move from the options market and Monday’s activity, the stock appears to be setting up for a dramatic move.
With earnings coming up, it’s an important time to analyze expectations. The earnings for Q2 isn’t expected to be pretty with an expected loss of $0.40 against a $0.63 gain from the same quarter last year. While the current picture for 2021 and 2022 isn’t great, the company is looking to expand through partnerships that may cause a sharp increase in analyst estimates and potential for upward movement.
The options market was active on Monday with call volume over 3.5 times the average with 35% of the volume getting filled at the ask and 23% at the bid price. One trade for 5,431 contracts on the 16 OCT 20 $18 call for $0.88 got filled between the market, but the big advance on Monday and other indications makes it appear as if it was a large buy order.
Action to Take: The current expected move, based on the implied volatility on the 28 AUG 20 expiration, is +/- $1.73. The indication from the option market is an upward move on the earnings that is larger than the expected move.
Speculators may want to consider buying the 28 AUG 20 15/16 long call vertical for around $0.50 or less.
