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Option Brief: Sirius XM Holdings Inc. (NASDAQ:SIRI) will take its turn in the earnings confessional ahead of next Thursday's open. As is often the case in the days leading up to such an event, premium on the stock's short-term options has grown. For example, SIRI's Schaeffer's Volatility Index (SVI) has risen to an annual high of 44%, while two weeks ago, this metric stood at a slimmer 34%. Echoing this is the equity's 30-day at-the-money implied volatility (IV), which shot to a 52-week high in yesterday's session. Simply stated, as demand for SIRI's short-term options has increased, so has the cost.
While hefty premium can serve as a deterrent for option buyers, it makes selling options an attractive strategy, and may have been the motivation behind one particular trader in SIRI's options pits yesterday. In the latter half of the session, one massive block of 20,591 May 3.50 calls changed hands at the bid price of $0.06, pointing to seller-driven activity. What's more, IV ticked higher as the transaction crossed, and the strike saw the biggest increase in open interest overnight, making it safe to assume that new positions were initiated.
By selling to open these out-of-the-money calls, the expectation is for SIRI -- presently priced at $3.14 -- to stay south of $3.50 through the close on Friday, May 16, when the soon-to-be front-month options expire. In this best-case scenario, the calls will expire worthless, and the trader can pocket the initial credit collected as her full potential reward. For Wednesday's call writer, this equates to $123,546 (number of contracts * premium collected * 100 shares per contract). Risk, meanwhile, is theoretically unlimited, should SIRI rally past the strike, and the call seller be assigned.
One way to minimize risk on a short call is to study the charts, and it appears Wednesday's call writer may have done just that. SIRI hasn't traded north of $3.50 since mid-March. What's more, its 20-day moving average -- currently located at $3.19 -- has emerged as a newfound layer of resistance, and put a quick stop to SIRI's two most recent rally attempts.
As noted, Sirius XM Holdings Inc. (NASDAQ:SIRI) will report quarterly earnings next week. SIRI has matched or exceeded analysts' bottom-line estimates in five of the past eight quarters, with the stock posting an average gain of 1.1% and 1.2% in the subsequent day and week, respectively. For SIRI's first quarter, consensus estimates are for a profit of 2 cents per share -- in line with the company's year-ago results.