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Trade sees limited upside for Skechers

David Russell (david.russell@optionmonster.com)

One investor is targeting a key level on Skechers USA's chart using a ratio spread.

optionMONSTER's Heat Seeker monitoring program detected the purchase of 7,500 August 28 calls for $0.90 and the sale of 15,000 August 29 call for $0.525. Volume was more than 18 times the previous open interest at each strike, indicating that new positions were initiated.

The trader collected a credit of $0.15 and stands to make an additional $1 per contract owned on a move to $29. That would result in additional earnings of $750,000. Profits will erode above $29, because they would be short 750,000 shares.

The strategy is known as a ratio spread because twice as many contracts are sold as the number bought. It can entail significant losses if the stock moves too far in the hoped-for direction, so today's investor might be using the trade in conjunction with a position in the shares.

SKX is up 0.52 percent to $26.88 in morning trading and has risen 19 percent since the beginning of June. The shoe retailer is now back near the same level where it broke support and then hit resistance while selling off in August 2010.

That could make today's trader think that it will stall around $29, giving him or her comfort that the position won't lose money to the upside. Alternately, the trader might have bought the stock around that level years ago and now wish to leverage a rebound while also programming an exit from the position. (See our Education section for other ideas on how to repair losing investments.)

The transaction also appeared before SKX's second-quarter earnings report after the closing bell this Wednesday.

Total option volume is 51 times greater than average in the name so far today, according to Heat Seeker. Calls outnumber puts by more than 250 to 1.

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