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Can Sirius XM Radio Inc (SIRI) Topple the $4 Level?

Options trader uses long calls and short puts to target upside in SIRI

by 8/9/2013 11:27 AM
Stocks quoted in this article:

With Sirius XM Radio Inc (NASDAQ:SIRI) perched near historical highs -- the stock tagged a five-year peak of $3.84 last Friday -- speculative traders are looking for inventive ways to jump on the bullish bandwagon. It appears one resourceful trader employed short puts and long calls on Thursday to build an aggressively bullish strategy.

Blocks of 3,696 contracts crossed the tape simultaneously on the January 2014 3.50-strike put and the January 2014 4-strike call. The puts traded at the bid price of $0.18 per contract, while the calls changed hands at the ask price of $0.26. In short, it looks as though this was a split strike synthetic long play, established for a modest net debit of $0.08 per pair of contracts.

This strategy -- also known as a long combination -- synthesizes the returns of a traditional long stock purchase. To the upside, gains are theoretically unlimited above the breakeven point of $4.08 (call strike plus the net premium paid). To the downside, losses are capped only at the $0 mark. At expiration, if SIRI is trading between the two strike prices -- as it is currently, at $3.82 -- the spread buyer loses the premium paid.

Profit Loss of Sirius XM Radio Synthetic Long
Chart courtesy of OptionsHouse

Recent out-of-the-money call selling notwithstanding, SIRI remains a popular choice among long call buyers. During the past 20 trading sessions, calls have been bought to open on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) at a rate of nearly 10-to-1 over their put counterparts.

Echoing this, the equity's Schaeffer's put/call open interest ratio (SOIR) of 0.21 stands 1 percentage point away from a new annual low, having plunged after July options expiration. Breaking this down, call open interest outweighs put open interest roughly 5-to-1 for options expiring within the next three months. Furthermore, the speculative crowd has rarely been so call-heavy over the past 52 weeks.

As noted, Sirius XM Radio Inc (NASDAQ:SIRI) is fresh from a new half-decade high, and has climbed close to 32% so far in 2013. Yesterday's spread buyer is hoping the trend will continue, as he will begin to profit once SIRI enters territory north of $4, which has not been explored since February 2007.


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