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The Gap Tags a New Multi-Year High Amid Bearish Speculation

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Will the retailer reverse direction over the next few weeks?

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The Gap Inc. (GPS) tagged a new decade-plus high of $36.60 yesterday after posting a bigger-than-expected 9% jump in August same-store sales. This peak hasn't gone unnoticed by call players, as approximately 11,000 of these options have crossed the tape so far, almost doubling the equity's expected intraday volume. By comparison, just over 6,300 puts have been exchanged.

However, more than 4,300 calls changed hands at the near-the-money September 37 strike -- the majority of them at the bid price, suggesting they were sold. These contracts crossed at a volume-weighted average price (VWAP) of $0.67. This option currently holds open interest of just 1,356 calls, implying that new positions are being initiated here today. In order for traders to collect the maximum potential profit from these sold-to-open calls, the stock must remain below the $37 mark through front-month expiration -- thus rendering the options worthless, and allowing them to pocket the entire premium received for selling the calls.

The security has seen its fair share of call buying as well. Data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows a 50-day call/put volume ratio of 2.11 for GPS, confirming that calls bought to open have more than doubled puts during the past few months. This ratio ranks in the 78th percentile of its annual range, meaning traders have been buying bullish bets over bearish at an accelerated clip.

Among the brokerage bunch, sentiment toward the popular apparel retailer is almost evenly split, with 11 analysts issuing "buy" or better endorsements, and 12 handing out "hold" or worse suggestions. Meanwhile, Thomson Reuters shows an average 12-month price target of $36.55, representing a discount to today's price peak. This configuration leaves plenty of room for upgrades and/or price-target hikes down the road, which could provide a tailwind for the stock.

Gap has been on a technical tear, boasting a whopping 52-week advance of 117%, as well as a year-to-date gain of roughly 96%. What's more, the equity has outperformed the broader S&P 500 Index (SPX) by close to 28 percentage points during the past three months. Should Gap maintain its positive momentum, today's bears could be singing a different tune by front-month expiration.

This article by Terri Stridsberg was originally published on Schaeffer's Investment Research.

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