Overview: Ross Stores (NASDAQ: ROST)

Ross Stores (NASDAQ: ROST) operates two chains of off-price retail apparel and home accessories stores in the United States.

Its earnings announcement is expected Thursday before the opening. The consensus earnings expectation is $1.47, an increase of nearly 26% over the prior year’s first quarter results.

Last week, UBS initiated coverage on ROST with a buy and price target of $90. ROST is trading around $81.

The Apparel Retail sector has performed well year to date, and ROST has gained nearly 28% during that time. Just recently shares trade from a low of $73.35, on May 3, up to a 52- week high of $83.11 on May 12.

With recent price levels in the shares, we expect a favorable earnings report and see potential upside, however given the recent run up, profit taking may result in a pullback in the stock price.

Options Trade – ROST Vertical Call Spread

An investor may consider a vertical call spread with a belief that ROST earnings will be strong.

If so, buy the ROST May 82.5/85 Call Spread for $0.35. With the stock trading around $81.00 this call spread has only two days left until expiration.

If the stock reaches a breakeven of $82.85 or higher, the spread becomes profitable. Because this is a debit spread (buying the lower strike of 82.5 for $0.55 and selling the 85 strike for $0.20) the maximum potential return for the spread is $2.50. The maximum loss for the strategy is the outlay of $0.35.

This is a trade that depends on the traders comfort zone for risk. The outlay is only $35 but the trader is counting on ROST to report strong earnings and quickly trade above $82.85.  

Stutland Equities is a premier futures and options trading company on the Chicago Board Options Exchange. Founded in 2005 and headquartered in Chicago, Stutland Equities specializes in volatility arbitrage across multiple asset classes.