$GPS traders win both ways

Nimble option traders profited as The Gap rallied last week, and now they are posting large gains on the stock’s reversal.

Even as the stock rose on March 1, Investitute’s proprietary programs cited the purchase of 4,000 18April $28 puts for $0.65 to $0.82 as part of a bearish spread with shares at $29.76. There was no open interest in the strike before that session began, showing that this was a new position.

Those puts traded for as much as $2.06 late this afternoon, more than 3 times their initial purchase price. The stock fell 10.55% in the same time frame, illustrating 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 down 2.32% to $26.58 today. The apparel retailer initially spiked higher on March 1 after beating quarterly estimates and announcing that it was spinning off its Old Navy brand, handing huge profits to bullish option traders at that time, but shares have pulled back sharply since then.