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January 15, 2013  Tue 3:16 AM CT

PetSmart has been parked at a long-term high for months, and one investor is worried about a drop.

optionMONSTER's Depth Charge tracking program detected the purchase of about 2,000 April 65 puts for $2.10 and the sale of an equal number of April 60 puts for $0.80. Volume was more than triple open interest at both strikes.

The trade cost $1.30 and will earn a maximum profit of 285 percent if the specialty retailer closes at or below $60 on expiration. It's known as a bearish put spread because it leverages a move between two prices, in this case $65 and $60. (See our Education section)

PETM fell 1.56 percent to $67.12 yesterday. The stock more than quadrupled in value between late 2008 and mid-2012 but has been trading in a range since then despite consistently strong financials. That could be leading some traders to believe that all the good news is priced in, making them concerned that a drop is coming.

The sector has also been weak recently, with the SPDR S&P retail fund up less than 2 percent in the last month while the broader S&P 500 climbed more than 4 percent in the same period. That marks a shift from earlier years, when the group consistently outperformed the broader market.

Total option volume in PETM yesterday was more than 14 times greater than its daily average, according to the Depth Charge. Puts outnumbered calls by a bearish 20-to-1 ratio.
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Using puts to BUY stock

Puts are an options contract that gives buyers the right to sell their stock for a set price on or before a future date. However, puts can also be an effective way to BUY stock.

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