Put spread looks for protection in Ross
David Russell | firstname.lastname@example.org
optionMONSTER's Depth Charge tracking system detected the purchase of 1,978 September 65 puts for $2.54 and the sale of 3,956 September 60 puts for $1.02. Volume was more than 50 times open interest at both strikes.
The trade cost $0.50 and will earn a maximum profit of 900 percent if the discount retailer closes at $60 on expiration. It's known as a ratio spread because twice as many contracts were sold further from the money than the number bought near the money.
Investors often use put ratio spreads to protect long positions. Yesterday's trade stands to earn leveraged gains on a modest pullback. It also obligates the investor to buy more shares if ROST goes below $60, but he or she might well be willing to do that.
If done in isolation as a simple bearish trade, the ratio spread would take its maximum profit with the stock at $60. Gains erode below that level and turn to losses under $55. (See our Education section)
ROST fell 0.72 percent to $66.42 but is up 40 percent so far this year. The next scheduled event that could serve as a potential catalyst is the release of July same-store sales on Aug. 2.
Overall option volume was quadruple the daily average yesterday, with puts outnumbering calls by 5 to 1, according to the Depth Charge.