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Option Brief: Sirius XM Holdings Inc. (NASDAQ:SIRI) has spent the past few months dawdling atop its 50-week moving average, and has finished just one week north of $4 in the last seven years. Nevertheless, one options trader yesterday gambled on multi-year highs for the streaming radio concern, but hedged his bets just in case.
During Monday's session, SIRI saw roughly 54,000 calls cross the tape, more than tripling the norm. Almost all of the action transpired at the January 2016 4- and 5-strike calls, where symmetrical blocks totaling 50,000 contracts changed hands. The 4-strike calls were seemingly purchased to open at a volume-weighted average price (VWAP) of $0.47, while the 5-strike calls were sold to open at a VWAP of $0.15. In other words, the speculator implemented a long call spread for a net debit of $0.32 per pair of options.
In a nutshell, the trader will begin to profit if Sirius XM Radio Inc. (NASDAQ:SIRI) conquers the $4.32 level (bought call strike plus net debit) by January 2016 options expiration. From SIRI's current perch at $3.58, it would take a rally of 20.7% over the next year-plus, in order to hit breakeven -- which would represent a multi-year high for SIRI.
However, while the sold calls limit the trader's risk to the net debit of $0.32 (as opposed to $0.47 per contract for "vanilla" calls), they also cap his maximum potential reward at $0.68 per pair of contracts (difference between strikes, minus net debit), no matter how high SIRI soars north of $5. Had the speculator simply bought the 4-strike calls, his profit potential would be theoretically unlimited.