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Skeptics Swarm Ross Stores Ahead of Sales Report

Speculators are scooping up front-month puts on ROST

by 12/31/2012 1:45 PM
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Since peaking at $70.82 in August, the shares of Ross Stores, Inc. (NASDAQ:ROST - 53.59) have surrendered roughly 24% beneath their 10-week moving average. What's more, it looks like some options players are bracing for even more downside for the retailer in the near term.

In afternoon trading, ROST has seen close to 3,900 puts cross the tape -- about eight times its average intraday put volume, and four times the number of ROST calls traded. Most popular has been the January 2013 52.50-strike put, which has seen almost 2,500 contracts change hands on open interest of just 1,805 contracts, pointing to an influx of new positions. Plus, the bulk of the puts traded at the ask price, suggesting they were bought.

By purchasing the puts to open, the buyers expect ROST to breach the $52.50 level within the next few weeks. More specifically, the volume-weighted average price (VWAP) of the puts is $0.91, meaning the buyers will profit if ROST sinks beneath the $51.59 level (strike minus VWAP) by January options expiration -- which encompasses Thursday's same-store sales report. However, even if ROST continues today's modest rebound -- prompted by a relatively upbeat Barron's article -- the most the speculators can lose is the initial premium paid for the puts.

Broadening our sentiment scope, we find that today's appetite for bullish bets runs counter to the growing trend seen on the major options exchanges. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), speculators have bought to open almost three ROST calls for every put during the past two weeks. What's more, this ratio ranks in the 65th percentile of its annual range, pointing to faster-than-usual bullish betting of late.

At last check, ROST has tacked on 0.7% to linger in the $53.59 region. For the year, the retailer is poised for a 12.7% gain.


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