* Stock extends pre-closing rally; options volume surges

* Q4 EPS 28 cents vs Wall Street view of 20 cents

* Cuts $32 million debt, sees fiscal 2010 EPS 50-65 cents (Recasts with sales and options surge; adds options details, outlook, quote, bylines; previous dateline SAN FRANCISCO)

By Alexandria Sage and Doris Frankel

SAN FRANCISCO/CHICAGO, July 7 (Reuters) - Shares of Ruby Tuesday Inc (RT.N: Quote, Profile, Research) rallied on Tuesday on expectations of strong earnings, and rose another 10 percent after the restaurant operator handily beat Wall Street estimates.

Volume in its stock options also surged to 19 times the average daily volume, with strong demand for calls to buy the company's stock for more than the $7.40 closing price on Tuesday.

"Today we saw speculative trade in the at-the-money July $7.50 calls," said Joe Kinahan, chief derivatives strategist at online brokerage thinkorswim.com in Chicago. "It would appear to be someone was speculating on prospects of good earnings."

Besides announcing strong earnings, Ruby Tuesday said it cut its debt by $32 million and noted that sales trends, while still negative, were stabilizing as customer traffic rose in the quarter.

Net income for the fiscal fourth quarter ended June 2 rose to $14.4 million, or 28 cents, from $13.9 million, or 27 cents per share, a year earlier. That was well above the 20 cents per share expected, on average, by analysts polled by Reuters Estimates.