Option trade on Gap, Inc

Gap Inc (GPS) has been trending lower for the past 6 months, and they report earnings in 9 days on November 19th. GPS recently reported weak sales in October with deceleration from previous months. (See: http://fortune.com/2015/11/09/banana-republic-sales/?xid=yahoo_fortune)

Gap currently trades at a P/E of 10 which is relatively cheap, but any weakness in their Q3 earnings will send the stock lower. Analysts at UBS and JP Morgan recently downgraded the stock to neutral and underweight respectively. Options are also pretty cheap considering the downside risk in the stock, and premiums are almost the same for puts and calls.

We are buying the December $26 Puts on GPS for .87 cents. This is a short term trade and we don't plan to hold this until expiration and will likely close out this trade within the next few weeks. Analysts are looking for .66 in EPS this quarter, and a beat on the top and bottom line would be a risk to our position. Their last earnings release sent the stock $1.50 lower, and history isn't really a guide in these situations, however it does give us some insight as to how their management has guided the street.