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Sirius XM: A Tale of Two (Potential) Trades

September calls and puts active in the wake of SIRI's annual meeting

by 5/24/2012 9:55:00 AM
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As Sirius XM Radio Inc (SIRI - 1.99) teeters around the $2.00 level with Liberty Media Corp (Capital) (LMCA - 28.33) circling like a Great White, options players continue to speculate on the future of the satellite radio firm.

Liberty Media has not tried to hide the fact that it wants to own the company and has been squirreling away SIRI shares (just shy of 47%). In order to control more than half of Sirius stock and take de facto control of the company, LMCA would need approval from the Federal Communications Commission (FCC).

While Sirius CEO Mel Karmazin has rebuffed Liberty's advances (including squashing any share buyback plans), he freely admitted at Sirius's annual shareholder meeting yesterday that "Our stock sucks." He also announced plans to unload 60 million of his own SIRI shares, or roughly half his position. In other news out of the meeting, the firm said it might change its stock symbol to SXM. Exciting stuff.

In the options pits yesterday, things got exciting right before the closing bell. Blocks of 25,000 contracts traded at the September 2-strike call and put strikes, and all of these contracts translated as new open interest this morning.

The call options traded for $0.19 per contract while the put contracts traded for $0.32 apiece. Both of these prices were between the bid and ask prices at the time of execution, making it less easy to determine the strategy driving the trade.

One possibility is a short straddle, which essentially bets that SIRI will stay right around the $2 level through September options expiration. If the trader's hunch is right, and the stock finishes right at the 2 strike when the options no longer exist, he keeps the total credit of $0.51. If the stock rallies, however, losses are potentially unlimited. And a drop in the stock means unlimited losses down to zero.

Profit/Loss Chart of Sirius XM short straddle
Chart courtesy of OptionsHouse

Breakevens for the short straddle are $2.51 and $1.49. The shares haven't spent much time north of $2.50 or south of $1.50 since late 2010, so the trader could find success with this bearish volatility trade. Short straddles (and strangles for that matter) are not for the faint of heart, however, given the limited reward and unlimited risk.

But wait there's more! Because the call option traded right at the mid while the put went off slightly closer to the bid price, it's a possibility that this was a synthetic long stock play. A long call traded with a short put replicates a long stock purchase but with less capital outlay. In this case, the trader would have paid $0.19 for the call and collected $0.32 for the put, resulting in a $0.13 credit for each spread versus $199 for control of 100 shares.

At expiration on September 22, breakeven for this trade would be $1.87 (the strike price less the 13-cent credit). North of that, profit increases into the stratosphere just like a long stock purchase and decreases all the way down to zero.

According to Schaeffer's Senior Equity Analyst Joe Bell, this is the more likely scenario. Bell observed, "Based on the price and volume chart of SIRI, there was big volume traded on the stock right when the options went off and the stock popped on this volume." He continued, "This would make me skeptical that it was a long or short straddle and would probably lean toward it being some sort of long position."

Profit/Loss Chart of Sirius XM synthetic long stock
Chart courtesy of OptionsHouse

As I noted on Monday, Sirius shares are currently testing support from their 80-week moving average. In the past few days, the stock's Relative Strength Index (RSI) has moved from 42.50 to 45.03, suggesting the shares could be coming out of a borderline oversold condition.

So on one hand, we could have speculators betting that SIRI will stay range bound. On the other, we potentially have bulls betting on a breakout in the shares. Either way, it should be an exciting time in the life of Sirius stock.


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