Stephen Faulkner - a very bullish bet with gains above $3.02
A Very Bullish Sirius XM Options Play Has Been Made
November 9, 2012 - Stephen Faulkner
At 11:24 this morning a player entered into a very bullish options play in Sirius XM (SIRI).
By digging into time and sales data one can find out if the options were bought or sold, and understand the sentiment of the player initiating the position.
There were two trades in this play:
Buy 24,413 January 2013 $3 call options for $13 each
Sell 24,863 January 2013 $2.50 put options for $11 each
For all intents and purposes these trade sizes could be considered equal. This resulted in the player initiating what I believe to be a very bullish position in Sirius XM.
By calculating the proceeds from the sale of the puts:
24,863 X $11 = $273,493
and then subtracting the purchase price of the calls:
24,413 X $13 = $317,369
We can arrive at the net outlay of cash the player had to spend to initiate this position:
$273,493 - $317,369 = -$43,876
The resulting position causes the following potential gains and losses at expiration of the options on January 19th, 2013:
Between closing prices of $2.50 and $3 per share at expiration, the player loses their initial cash outlay of $43,876.
Below $2.50 per share the player loses and additional $24,863 for every penny under $2.50 at expiration as well as losing their initial outlay.
Above $3 per share the player gains $24,413 for every penny over $3 at expiration, with a break even point of roughly $3.02 per share at expiration due to the original outlay which is lost.
So how can we use this to gauge the sentiment of the player? It can be expected that this player intends to make money, and thus it can be expected that this player sees pricing beyond $3.02 on January 19th, 2013 when his options expire. The player likely assumes that the initial outlay of $43,876 is an acceptable risk, and certainly assumes that prices will not decline beyond $2.50 per share.
This is a very bullish bet, with a lot of downside risk under $2.50 per share and a lot of potential gains above the $3.02 mark. Both the call purchase and put sale are bullish bets, but married together in such a fashion there's only one way this player expects the price to go, and that is up.
Does this mean investors should take the same trade if they are able? No. It's certainly risky and presents losses at any point under $3.02. That's not leaving a lot of room for error. Every investor must #$%$ their own tolerance for risk.
What investors in Sirius XM can consider here, though, is that there's a deep pocketed player out there who seems comfortable with the idea that share prices are due to climb considerably over the next 10 weeks. Perhaps this player took the most recent dip and seized opportunity as I outlined in my article from earlier today? If you're long, you're on this player's side, and it can provide a bit of comfort to see such a large scale bullish play being made in a short term uncertain market.
With the prospects for Sirius XM in positive territory for the future, a potential FCC response to the Liberty Media (LMCA) request to go beyond 50% control, pending buybacks, and improving company performance on the back of new auto sales, I believe this player could very well end up with full pockets come January 19th. Good luck to him.
"If I sell a $2.50 put for $13 right now I hope the price stays above $2.50 where I get to keep the time premium."