IB Options Brief: Gap, Inc. (GPS) & Morgan Stanley (MS)

Posted April 25th, 2012 by Caitlin Duffy in Unusual Activity

GPS ñ Gap, Inc.
Shares in the apparel and accessories retailer are up 1.6% at $27.63 this morning, just off Fridayís fresh 52-week high of $27.95. The stock has soared in 2012, rising nearly 50.0% year-to-date. But, a large bear put spread initiated in the front month a couple of minutes into the trading day suggests one strategist is prepared should shares slip in the near term. Gap is scheduled to report first-quarter earnings on May 17th after the close.

The trader responsible for the hefty spread appears to have purchased 10,000 puts at the May $26 strike, sold the same number of puts at the May $24 strike, all for a net premium outlay of $0.32 per contract. The put play may be a hedge to protect a long position in the underlying shares, or an outright bearish bet predicting limited declines in the share price leading up to- or following earnings.

Profits, or downside protection, kick in if shares in GPS fall 7.0% to breach the effective breakeven point at $25.68, with maximum potential gains of $1.68 per contract available in the event of a 13.1% pullback in the stock to $24.00.

MS ñ Morgan Stanley
Shares in Morgan Stanley are down more than 20.0% off the March 26th six-month closing-high of $21.18, but one sizable options play on the name today seems to be looking for a quick recovery in the price of the underlying during the next three weeks. The shares are down 2.6% this afternoon to stand at $16.95.

The options play eyeing limited bullish movement in the price of the underlying appears to be a ratio call spread combining the purchase of around 10,000 May $18 strike calls with the sale of roughly 20,000 May $20 strike calls, all for a net premium of $0.14 per contract.

The strategy is profitable as long as shares in the financial services firm rally 7.0% to top the effective breakeven price of $18.14 with maximum possible profits of $1.86 per contract available should the stock gain 18.0% to settle at $20.00 at expiration next month.

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