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Sirius XM Option Bulls Don't Fear the $3 Level

November-dated long calls purchased in SIRI

by 10/19/2012 11:11 AM
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Bullish options traders are hoping Sirius XM Radio Inc (NASDAQ:SIRI - 2.94) continues to take out new annual highs -- at least for the next few weeks. Call volume was notable in the stock's options pits on Thursday, running five times heavier than normal, with almost 70,000 contracts trading. By contrast, fewer than 10,000 puts changed hands.

A large chunk of this call volume was centered on the soon-to-be-front-month November 3 strike, where almost 13,000 contracts traded, more than 9,000 of which translated as new open interest this morning. Buyer/seller data from the International Securities Exchange (ISE) -- along with a pop higher in implied volatility at this strike -- suggests the bulk of this activity was initiated by buyers.

Given the average purchase price of $0.10 per call, the breakeven for this trade is $3.10, which needs to be surpassed by November options expiration in 28 days. The last time SIRI traded above the $3 mark was early 2008. But bullish traders are hoping the trend will be their friend, as SIRI has rallied 61% so far in 2012, and has increased in value by a factor of roughly 37 since its December 2008 nadir of $0.08 per share.

It's also possible that some of yesterday's action was the work of covered call sellers who are looking to capture a bit of premium on their stock position. Any call sellers would also likely be willing to sell out of their SIRI stock holding, should it clamber over the 3 strike within the next month.

With the stock outperforming the S&P 500 Index (SPX) by 30 percentage points during the past three months, it's no surprise that call speculation has increased. The 50-day call/put volume ratio -- which measures buy-to-open activity at the ISE, Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) -- stands at 12.08, meaning more than 12 calls have been purchased during the last 10 weeks for every put. This ratio is higher than 79% of the past year's worth of data.

SIRI is expected to report earnings on October 30, ahead of November options expiration. Analysts are expecting per-share results of two cents, in line with year-ago results, and in the past four quarters, the broadcasting name has managed four positive earnings surprises. A continuation of this pattern could be good news for any recent call buyers; the stock gained almost 8% the day after its most recent report.


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