Call options were in heavy rotation Monday on The Gap (GPS). Within the first hour of trading, 3,350 of these bullishly oriented options crossed the tape -- about four times the expected number of call contracts. The bulk of this activity took place at The Gap's January 2011 22.50 call, where 3,031 contracts were traded. Approximately 77% of these calls changed hands at the ask price, indicating they were purchased.
However, this skew toward calls simply continues a recent trend for GPS. During the past 10 days, speculators on the International Securities Exchange (ISE) have bought to open 5.99 calls for every put on the retailer. This ratio ranks above 75% of other such readings taken during the previous year, indicating that traders on the ISE have purchased calls over puts at a faster pace just 25% of the time.
In light of the stock's solid price action, this rising appetite for calls makes sense. GPS has trekked consistently higher since late August, with the stock catching a lift from support at its rising 10-day, 20-day, and 32-day moving averages. In fact, during the past 40 sessions, GPS has outperformed the broader S&P 500 Index (SPX) by more than five percentage points, on a relative-strength basis.
With GPS hovering near $21.25, those January 22.50 calls are out of the money by more than a point. Plus, the shares have recently been stifled by resistance in the $21.50 to $22.00 neighborhood -- and the growing accumulation of January 22.50 calls could further exacerbate the equity's woes. This overhead strike already carries open interest of 8,923 contracts. If traders continue to add new contracts at the January 22.50 call, it could create an options-related roadblock for the shares.
That might not be terrible news for January 22.50 call buyers, though. With 3.3% of the stock's float sold short, it's possible that traders are buying out-of-the-money calls in order to hedge their shorted GPS shares.
Elizabeth Harrow is a senior equities analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the video series Schaeffer's Daily Q&A on SchaeffersResearch.com.