New Gap CEO cause for upgrade and optimism

Gap Inc. (NYSE: GPS) opened at $17.33. So far today the stock has hit a low of $16.98 and a high of $17.65. As of 10:45, GPS is trading at $17.63, up $0.72 (4.3%).

After rising between March and June, the stock has been falling sharply during the month of July. As Zac Bissonnette noted yesterday evening, the company has appointed a new CEO, and investors are taking this as very good news today. The stock was upgraded by Citigroup this morning to a buy on the basis that the company's newly appointed CEO Glenn Murphy developed a record of "redefining customer in-store experience" while heading Canada's Shoppers Drugs Mart. Citigroup feels as though Murphy will bring the same ability to drive growth to Gap that he was able to achieve in his previous job. Technical indicators for GPS are bullish but deteriorating, while S&P gives the stock a negative 2 STARS (out of 5) sell rating.

For a bullish hedged play on this stock, I would consider a December bull-put credit spread below the $15 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk and leverage returns. For this particular trade, we will make an 11.1% return in just 5 months as long as GPS is above $15 at December expiration. GPS would have to fall by more than 13% before we would start to lose money.

GPS hasn't been below $15 at all in the past year and has shown support around $16.90 recently. This trade could be risky if GPS continues to disappoint investors, but even if that happens, the new CEO could get a little leeway for a while to turn the company around.

Brent Archer is an options analyst and writer at Investors Observer.