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May 7, 2012  Mon 9:53 AM CT

FOSL: SEE CHART GET CHAIN FIND STRATEGIES
Fossil has been stumbling near all-time highs, and one investor is worried before tomorrow's earnings report.

optionMONSTER's Depth Charge tracking program detected the purchase of 1,125 May 120 puts for $3.80 and the sale of 2,250 May 105 puts for $0.90. Volume was above open at both strikes.

The trade is known as a ratio spread because twice as many puts were sold as were bought. That increases leverage by reducing the cost basis but also obligates the investor to buy shares for $105 if they fall below that level.

He or she is probably a long-term holder in the fashion watch maker and would be willing to own more if it drops that far. The ratio spread protects the value of the existing position as the pullback occurs.  (See our Education section for more on hedging strategies.)

It cost $2, and will earn a maximum profit of 650 percent if the stock closes at $105 on expiration.

FOSL declined 1.32 percent to $127.48 in morning trading. It's up 60 percent since the start of January and has been trending higher for years. But earnings have grown less impressive recently, which could make some investors nervous before tomorrow morning's results.

Overall option volume is 7 times greater than average so far today, with puts outnumbering calls by more than 3 to 1.
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