GPS Analysis

The Gap Inc. (GPS)

GPS publishes earnings on Thursday after the closing bell.

I shall use options that trade for the last time eight days hence, on Aug. 25.

Implied volatility stands at 41%, which is 3.1 times the VIX, a measure of the volatility of the S&P 500 index.

GPS’ IV stands in the 53rd percentile of its annual range and the 75th percentile of its most recent broad movement.

The price used for analysis was $22.61.

Premium: $1.31 Expire OTM  
GPS-iron fly Strike Odds Delta
Long 25.50 85.5% 17
Break-even 24.31 ~82.0% ~21
Short 23.00 58.8% 45
Puts
Short 23.00 41.1% 55
Break-even 21.81 ~60.0% ~37
Long 20.50 83.0% 15

The premium is 52% of the width of the position’s wings.

The risk/reward ratio is 0.9:1.

The expected move is $1.35 either way, broader than the $1.25 breakeven width.

Decision for My Account

The GPS grid was tricky to worth with, because strike prices n the areas I needed to build a well constructed position lacked bids and so weren’t liquid enough for me to utilize. After compromising on the long legs, I found myself with a structure that had a breakeven width that is narrower than the expected move, covering 92%. It’s a small risk, but one that I’m declining to take. My rule-of-thumb is that the ratio needs to round up to one or greater, and that is not the case here. I’m passing on the trade.

By Tim Bovee, Portland, Oregon, Aug. 17, 2017

Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

License
Creative Commons License

All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.

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