$GPS bears hit the gap

Downside option traders are making big profits in The Gap (GPS) today after a gap lower following earnings.

On May 18, Market Rebellion’s Unusual Activity Service found that 6,800 Weekly $11.50 puts, expiring today, were bought for $0.61 to $0.64 as part of a bearish spread with shares at $12.04. This was clearly fresh buying, as open interest in the strike was just 3,039 contracts before the activity appeared.

Those puts have traded for as much as $1.67 today, over 2.5 times their purchase prices. The stock fell 17.44% in the same time period, underscoring how options can far outperform moves in their underlying shares on a relative basis.

Long puts lock in the price where a stock can be sold no matter how far it might drop, gaining value in a selloff with the potential for significant leverage. The contracts can be purchased either as an outright bearish bet or a hedge on a long-stock position.

GPS was last at $11.36, up 2.11% on the day after gapping lower at the open to $9.51.