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Sirius XM Radio's New High Attracts Call Traders

However, one speculator takes profits off the table

by 10/3/2012 10:04 AM
Stocks quoted in this article:

The shares of Sirius XM Radio Inc (NASDAQ:SIRI - 2.66) tagged a new multi-year high of $2.68 on Tuesday, a technical milestone that didn't go unnoticed by call players. Approximately 39,000 of these options crossed the tape yesterday, nearly quadrupling the equity's average single-session call volume. Conversely, fewer than 3,600 puts changed hands.

Tuesday's penchant for SIRI calls over puts is merely part of a larger options trend. In fact, the security sports a 50-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio of 12.18, indicating that traders have bought to open more than a dozen calls for every put during the past few months. This ratio is docked in the 82nd annual percentile, meaning speculators have been picking up calls over puts at a faster-than-usual pace.

However, it bears mentioning that short interest on the satellite radio darling spiked by about 15% during the last two reporting periods, and now makes up about 16% of SIRI's available float. This suggests that some of the recent buy-to-open call activity could be attributable to short sellers looking to hedge their bearish positions. Either way, it would take nearly six days to buy back these shorted shares, at the stock's average pace of trading.

Digging deeper into yesterday's data, it appears that a block of 7,905 calls was bought at the January 2013 3 strike for $0.08 apiece, while a matching number of calls were sold at the January 2013 2.50 strike for $0.26 each -- yielding a net credit of $0.18 per pair of contracts. According to data from Trade-Alert, this may have closed a bull call spread that was opened in mid-March for roughly $0.14 per spread. A four-cent profit on this strategy buying for $0.14, selling for $0.18 -- is a return of more than 28% in under seven months. A bull call spread's maximum potential profit is the difference in strike prices less the original premium paid, while the maximum loss is simply the premium paid. With SIRI at new annual highs, the investor may have taken this opportunity to close the position in favor of other opportunities.

More than half of the analysts following SIRI maintain high expectations for the security, as six "strong buy" endorsements have been handed out, compared to three "holds" and one "strong sell." This optimism isn't surprising, considering the stock's year-over-year gain of about 78%, as well as its year-to-date advance of nearly 44%. The security has also outpaced the broader S&P 500 Index (SPX) by almost 19 percentage points during the past three months. On the charts, the stock continues to trade atop its 40-day moving average, which has acted as a floor since early July.

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