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Ross trader positions for meager rally

David Russell (david.russell@optionmonster.com)

One investor expects modest gains for Ross Stores.

optionMONSTER's Heat Seeker monitoring program detected the purchase of 1,500 May 57.50 calls for $2.27 and the sale of 3,000 May 60 calls for an average premium of $1.135. Volume exceeded open interest at both strikes, indicating that a new position was implemented.

It cost nothing to initiate and will inflate to $375,000 if the discount retailer closes at $60 on expiration. Gains will erode above that level and turn to losses over $62.50.

Known as a ratio spread , the strategy is designed to leverage a small move. It costs very little because they sell more contracts at the higher strike. That also forces them to be short stock at a certain level.

In this case, the investor probably owns ROST shares and is using the ratio spread as a so-called repair strategy. The trader is likely down in the stock and now wishes to earn some extra juice from a move to $60. Above that level, he or she is happy to exit the position. (See our Education section for more ideas on how options can be used to manage positions and turn losing trades into winners.)

ROST is up 0.78 percent to $58.52. It's down 12 percent in the last six months despite double-digit gains for the S&P 500 and the broader retail sector in the same period. The shares are also below their 200-day moving average, which could be leading some chart watchers to expect upside to be limited in coming weeks.

Total option volume in ROST is triple the daily average so far today, according to the Heat Seeker. Calls outnumber puts by 23 to 1.

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