Traders bet Gap could plunge 11% on earnings

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Options traders think Gap could gap lower when it reports earnings tomorrow

Gap Inc. could be headed for a major plunge.

Options traders are betting the clothing retailer's shares could drop by over 11% after its Thursday earnings report, bets largely fueled by the stock's higher-than-usual implied volatility, says longtime market-watcher Mike Khouw.

"We did see more than two times the 20-day average put volume," or bearish trades, in Gap as the stock's 11.5% implied move far outweighed its average 8.5% move in either direction after earnings, said Khouw, who is co-founder and chief strategist at Optimize Advisors.

The most active trades were purchases of the $15.50 weekly puts expiring this Friday, he said Wednesday on CNBC's "Options Action."

"Those were trading for about 40 cents," Khouw said. "So, buyers of those puts are betting that that implied move is going to be at least that magnitude to the downside, possibly larger."

Gap shares were trading near the $18 level in early Thursday trading as they climbed more than 5%.

Other experts were generally in agreement with the options market.

"I'm lukewarm on it," Karen Finerman, CEO of Metropolitan Capital Advisors, said in the same "Options Action" segment. "It's cheap, but it should be. So, I don't own it. I'm not long."

Tim Seymour, founder and chief investment officer of Seymour Asset Management, warned Gap's power over shoppers was waning.

"Simply, these guys aren't doing enough direct-to-consumer," he said on Wednesday's "Options Action." "You need to go into that store, and when you do, you're looking for something that's almost free. I don't think Gap has the brand anymore."

Gap's stock is down almost 31% year to date.

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