Gap Inc. (NYSE: GPS - option chain) stock is falling today after the company reported its same-store sales fell 6% in May, worse than the 5% decline predicted by analysts. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on GPS.
This morning, GPS opened at $17.50. So far today the stock has hit a low of $16.74 and a high of $17.70. As of 11:50, GPS is trading at $16.77, down $1.46 (-8.0%). The chart for GPS looks bearish and S&P gives GPS a negative 2 STARS (out of 5) sell ranking.
For a bearish hedged play on this stock, I would consider a July bear-call credit spread above the $20 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make an 8.7% return in six weeks as long as GPS is below $20 at July expiration. Gap would have to rise by more than 19% before we would start to lose money. Learn more about this type of trade here.
GPS hasn't been above $20 since September and has shown resistance around $19 recently.
Brent Archer is an options analyst and writer at Investors Observer.
DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in GPS.
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