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Sirius XM Holdings Inc. (NASDAQ:SIRI) was among the top-10 most heavily traded equities in the options pits yesterday, as more than 150,000 contracts crossed the tape. Put volume came in at almost seven times what's typically seen, while call volume tripled the usual pace. One single spread trade, however, accounted for roughly two-thirds of the day's total volume.
Shortly before noon ET, blocks of 50,000 contracts traded simultaneously on the June 3 put and the June 3.50 call. Implied volatility edged higher on both transactions, and Trade-Alert indicated that the puts were purchased for $0.14 apiece, while the calls were sold for $0.09 each. Open interest skyrocketed at both strikes overnight, confirming the positions were traded on the opening side. All told, the net debit for the 50,000-contract spread was roughly $250,000 (50,000 contracts, times the net debit of $0.05, times 100 shares of stock represented by each contract).
This strategy -- known as a bearish risk reversal or a synthetic short -- is similar in both risk and reward to a short stock position. The spread has unlimited risk potential north of the 3.50 strike due to the short call. Gains, meanwhile, increase as the underlying approaches zero (below the breakeven mark of $2.95, or the put strike less the net premium paid). Finally, if SIRI is trading between $3.00 and $3.50 at expiration, both options would expire worthless, and losses are limited to the net premium paid.
Sirius XM has some high-profile events on the calendar before these June options expire. First, the company's first-quarter earnings are expected the week of April 28. Then on Monday, May 19, the company will host its annual shareholder meeting. There will likely be a weighty agenda to cover, especially in light of Liberty Media Corp's (NASDAQ:LMCA) recent announcement that it will not buy the remaining stake of the satellite radio company. Things aren't starting off too well for yesterday's bearish speculator; Sirius XM Holdings Inc. (NASDAQ:SIRI) is up 1.3% at $3.21 in the wake of an early morning upgrade. It's noteworthy as well that SIRI has not closed south of $3 since last April.