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Premium Seller Stays Neutral on Sirius XM Radio

SIRI was the subject of a delta-neutral call strategy

by 9/6/2012 9:58 AM
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Call option volume ramped up on Sirius XM Radio Inc. (NASDAQ:SIRI - 2.53) during the course of Wednesday's session, with approximately 25,000 contracts crossing the tape -- representing 1.24 times the norm. Taking a closer look at this influx of SIRI call activity, it looks as though one premium seller was responsible for the bulk of the volume.

Specifically, a block of 20,000 January 2014 2-strike calls traded shortly after midday at the bid price of $0.74, indicating they were sold. Implied volatility on this LEAPS option declined by 0.6 percentage point, and open interest surged overnight by 20,025 contracts. In other words, it seems safe to assume that new calls were sold to open at this strike on Wednesday. Based on the bid price of $0.74 -- or $74 per each contract controlling 100 shares -- this speculator would have raked in $1.48 million on the sale.

However, this block of written calls traded simultaneously with about 1.46 million shares of SIRI stock. Given the equity's price of $2.53 at the time, the shares would have cost just over $3.69 million. This trade is essentially delta-neutral, since the sold options carry a delta of 77%, and the trader purchased enough shares to cover roughly three-quarters of his short call exposure. (Short calls have negative delta, long stock has positive delta).

From a broader perspective, options traders have lately been favoring long calls on SIRI. Over the past 10 days, 10.40 calls have been bought to open for every put, according to data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). In the front-month series, peak call open interest of 43,248 contracts can be found at the near-the-money September 2.50 strike.

Technically speaking, the $2.50 area has been acting as support for SIRI since mid-August. Year-to-date, the stock is up more than 38%.

 Daily Chart of SIRI since June 2012


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