Let's Talk About Gap (GPS)
Let's Talk About Gap (GPS) Hello Smart Option Sellers! Every once in awhile we'll have a position in which we are faced with a decision on what to do with it. In this case, it's GPS. We currently hold a September 2019 $18 strike put-sell position which was rolled from a prior position. GPS is a stock in the retail clothing sector that has been in a price slump since early 2018. Although we've taken six prior positions with the stock, we had large enough cushions in each case for us to walk away as winners. This seventh time, we're in a different scenario. With the strike at $18 and the stock price at $17 as I type, it puts the stock price at $1 below the strike price. The stock has rallied back up since last week after hitting 8-year lows near $15.22 per share. With earnings being released after the bell tomorrow (8/22), we are faced with a decision on what to do. Based on the earnings of other similar companies in the same sector, things haven't been the brightest. But can GPS buck that trend? Are we willing to hold and see if it rallies? If it does, our position will move favorably rather quickly. If it doesn't, we could be holding a stock which could take a long time to turn around and recoup our investment. I'm not interested in rolling again, as that might just prolong the stress. The best course of action is to make a hedge trade today in which we'd buy a lower strike put option for next week's expiration just to get us through the earnings and any subsequent price reaction. This would protect us in case of a really bad earnings report, but it wouldn't allow us to lock in any gains. It would only allow us to stem the loss from our current $18 put-sell position. If GPS stock rallies on Friday, then it's all good until expiration next month. If GPS stock falls, then we would most likely lock in a few dollars of loss per contract. So, I'll offer a few choices on what to do, and you can decide for yourselves which fits your risk tolerance the best. I'll also signify which will be the official trade for the group as a whole. Here's what you can choose to do: Note: you will only execute this buy-back trade if you already hold the put-sell position in your account. If you don't have the position, you can disregard these instructions. 1. Do nothing. Just pretend you're on vacation and you're oblivious. The price of the stock after the earnings report will either make you happy or sad. If it drops, you will be at risk for assignment. 2. Get out of the trade today or tomorrow before earnings are released. If you take this route, you will lock in a loss of roughly $.70 per contract on our current September 2019 $18 put option. This will be in addition to the $.74 per contract loss on the prior June 2019 $20 put option. This would be a loss of roughly $1.44 per contract total between the two positions (depending on your entry points). 3. You can choose a new put option to roll to. Currently, you could roll to the March 2020 $16 put options which are trading near $1.95 per contract. If done, it will give $2 of cushion below our current $18 puts, but it still leaves you susceptible to holding a position in the face of a bad earnings report. 4. Buy a hedge trade. This will be our official trade today. My gut is leaning towards an acceptable earnings report from GPS that won't knock the stock too much. Expectations are already pretty low, so any surprise "beat" will help the stock to rally. With that said, it never hurts to cover yourself for a worst-case scenario. Here's what you can choose to do: Buy (buy-to-open) the GPS August 30, 2019 $15 put options for a limit buy price $.35 per contract or less, day-only, as an opening transaction (buy-to-open). Currently, this put option has a market of $.32 bid/$.34 offer, so it can be bought for under $.35 per contract at the moment. You can make this trade today or tomorrow. Note the "day-only" designation. It is not a "GTC" order. What can happen? 1. If GPS stock stays at its current price or rallies, the hedge trade will be a loser, but that's okay, as we just don't want the stock to go down. This should set the stage for the stock to stay elevated until expiration next month which should leave us relatively unscathed or with minor losses. 2. If GPS stock goes down below $15, we will be protected by the hedge trade, but we will incur a loss of at least $3.00 per contract, which is the distance between the $18 & $15 strikes. This will be our worst-case scenario. 3. If GPS trades anywhere between $15 & $18 through September expiration, we could incur various levels of loss. If earnings reports weren't such a crapshoot, I'd just have us leave the positions as-is and not worry about it. But since GPS has been trending lower and the sector as a whole has been weak, it's smart to make the hedge trade. Once again, the decision is yours on which choice to make. Officially, we will be taking the hedge trade. If you decide to act, make sure you do so before the end of the day tomorrow (8/22). I will send out an update on Friday. Well, that's all for today. Continue to hold all other open positions as-is. Contact us here with fills, comments, questions or concerns. Regards,
Lee Let's Grab That Cash!