Today, we recommend entering a short-put trade on The Gap Inc. (GPS).
Despite positive hiring and consumer spending trends, the apparel industry has returned to support. This technical retracement is especially obvious on GPS shares that have retraced to long-term support near $19-20 per share.
To a certain extent, the pullback following GPS's post-earnings rally makes sense. The company is still working on a turnaround, which has brought back buyers, but market volatility is going to be an issue this year and traders have been taking profits off the table this month.
We expect the market to resolve in favor of the underlying fundamentals, which means retail stocks are undervalued as a group. Because GPS' efficiency gains present some of the best potential upside, we like this for a new bullish entry.
Selling puts with a strike price below technical support gives the shares a little room to swing back and forth if traders remain cautious this week as earnings season kicks off. Additionally, Predictive Alpha still has a bullish projection (+2.52%) for the stock over the next four weeks.
To ensure you maintain as much control over your entry price as possible, we recommend you...
Set a limit order to sell to open the GPS May 17, 2024 $20 Puts (GPS240517P00020000) for a minimum price of $0.40.
Some traders prefer a short vertical put spread to an outright short-put position.
A spread has the advantages of limiting risk, a much lower margin requirement, less risk of exercise, and can be used in some retirement accounts. However, it will also result in a lower premium payment and return.
For traders interested in using a short vertical put spread, we recommend the following...
Set a limit order to sell to open the GPS May 17, 2024 $20 Puts (GPS240517P00020000) for a minimum price of $0.40.
Buy to open the GPS May 17, 2024 $18 Puts (GPS240517P00018000) for a maximum price of $0.10.
Note: The prices of the two legs of a vertical spread can shift quickly. We recommend targeting a net credit of $0.30. So, if the price of each leg has shifted beyond our recommended maximum or minimum, but a net credit of $0.30 is available, we still recommend the trade. If you are unfamiliar with spread trading like this, check out our educational videos below…
Timing is everything when it comes to these trades, so head to your app store now, download the free TradeSmith app, and enable push notifications… because the next great trade is right around the corner!
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Sincerely,
John Jagerson & Wade Hansen Analysts, Predictive Alpha Options
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