Investor shops for more upside in Ross


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Option volume surged in Ross Stores yesterday as an investor bet that the discount retailer would continue its advance into record territory.

The trade included the purchase of 5,215 May 62.50 calls for $1, plus the sale of 5,215 May 57.50 puts for about $0.37 and 10,430 May 65 calls for $0.30. It pushed volume to more than quadruple open interest in all three contracts.

Selling more options than were bought reduced the cost of the trade so it actually produced a small credit of about $0.04. The investor now stands to earn a maximum profit of $2.50 if ROST rallies inches up to $65. Because the position is short twice as many calls at the highest strike, he or she will be forced to sell stock above that level.

The investor is also on the hook to buy more shares for $57.50 if they drop that low. Given the risk profile, the trade was probably the work of someone who owns the name. He or she is apparently willing to buy more stock on a pullback and have extra available to cover the short calls if it goes over $65.

The strategy combines elements of a ratio spread with short puts . While unusual, it illustrates the wide variety of ways that options can be used to manage portfolio positions. (See our Education section)

ROST fell 1.16 percent to $61.50 yesterday but is up 67 percent in the last year. It reports April same-store sales on Thursday and first-quarter earnings on May 17.

Overall option volume was 15 times greater than average in yesterday's session.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Copyright © 2010 OptionMonster® Holdings, Inc. All Rights Reserved.

This article appears in: Investing , Options

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