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Will Sirius XM Radio Bulls Be Right?

SIRI bulls took a shine to October 2.50 calls

by 9/14/2012 9:08 AM
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Options players are expecting Sirius XM Radio Inc (NASDAQ:SIRI - 2.47) to muscle back atop the $2.50 level, which served as support from mid-August until earlier this week. During the course of Thursday's session, the stock saw roughly 22,000 calls change hands, far surpassing its average daily volume of around 13,000 calls. Meanwhile, just over 2,400 SIRI puts were exchanged.

Digging deeper, speculators established new positions at the October 2.50 call, which saw open interest soar by nearly 4,300 contracts overnight. Plus, 78% of the back-month calls crossed at the ask price, confirming our suspicions of buy-to-open activity. By purchasing the calls to open, the investors are hoping SIRI reclaims its perch atop the $2.50 level. More specifically, the volume-weighted average price of the near-the-money calls was $0.08, meaning the buyers will begin to profit if SIRI tackles the $2.58 level (strike plus premium received) within the next several weeks.

Yesterday's preference for calls was just more of the same for SIRI, though. During the past two weeks, traders have bought to open nearly eight calls for every put on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). However, it's worth noting that short interest jumped 9% during the most recent reporting period, and now represents nearly six sessions' worth of pent-up buying demand, at SIRI's average pace of trading. As such, it's possible that short sellers are buying calls to hedge their bearish bets.

Elsewhere on the Street, the analyst crowd is optimistically aligned toward SIRI. The security has earned six "strong buy" ratings, compared to three lukewarm "holds" and just one "sell" or worse recommendation. Furthermore, the consensus 12-month price target stands at $2.80 -- a level SIRI hasn't conquered since May 2008.

Technically speaking, the shares of SIRI have stair-stepped higher since mid-July, but recently broke support at the aforementioned $2.50 level. Plus, the equity continues to stare up at its bearishly crossed 10-day and 20-day moving averages, which could limit any rebound attempts.

Fundamentally, investors continue to keep an eye on majority shareholder Liberty Media Corp. (NASDAQ:LMCA), which applied with the Federal Communications Commission (FCC) to take control of Sirius back in August. However, just this week, Liberty Media Chief Executive Greg Maffei said a tax-free spinoff of SIRI -- which many investors have been anticipating -- "may become logical, but I don't see that as something we need to get done in the near term."

Daily Chart of SIRI since May 2012 With 10-Day and 20-Day Moving Averages


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