Sirius Call Options May Not Indicate Bullish Sentiment

In recent articles, I posted the numbers of curiously high call options activity in SIRI for the Sept $1.00, Dec $1.00 and January $2.50 strike prices. As we draw closer to these dates and I see the stock price begin to stagnate a bit, another possibility begins to form in my OCD brain. That possibility has more to do with call options traders selling covered calls against their existing shares to either offset prior losses or simply earn some extra money while they wait for their shares to gradually rise. When I looked a little further into each strike price and saw deltas of $.02 to $.09 per contract, this possibility seems a bit more plausible than the idea of that many contracts being scooped up from sheer bullish sentiment.

For those of you that are blinking your eyes in confusion; I’ll try to explain what this all means without putting you to sleep with boredom.

As a simple definition, when you buy an options contract you are basically buying that contract from someone who owns shares of the stock itself. The owner of the actual stock sells you the right to buy those shares by a specific date in the future (expiration date). If the price of the underlying stock does not exceed that options strike price, the contract expires worthless and the owner of the stock keeps the money you paid for the contract. Here is an example:

Let’s say hypothetically, that I own 1000 shares of Microsoft (MSFT) and the stock is currently trading at $21.00 per share. If I think that the stock price will stay below $25.00 per share by the next expiration date (3rd Friday of each month) then I may sell into the market an option to by those 1000 shares. Looking at the 25.00 options strike price and seeing that it is trading at 1.00 per contract, I could sell 10 call contracts (which is equal to 1000 shares of stock) and potentially make $1,000 if the stock remains below $25.00 per share by the expiration date.

So basically if you pay me $1000.00 for the right to buy these shares at $25.00 and the stock goes higher than the 25 strike by the expiration, I keep your money but then I have to hand over my shares to you for $25.00 per share. If it stays below $25.00, I keep your money and you get “el zippo.”

So let's apply this to SIRI. Let's say that someone owns 50,000 shares of SIRI stock purchased at .50 per share but he/she thinks it will stay below $1.00 by Dec. 2009. The Dec 2009 strike is trading at .05 per contract, giving the share holder an extra $2500.00 profit by selling 500 call contracts. If the stock goes over $1.00 then the owner of the stock hands over the shares for $1.00 each, but instead of making full profit, he/she keeps the initial $2500.00 from the sale of the contracts and any profit from the stock minus the decline in value from the sale of the call option.

All of this is based on the assumption that the delta of the strike price is $1.00. The Delta is the amount that an options contract value will increase or decrease for each $1.00 that the stock price moves. For example: if the delta of Microsoft is $.50 then your contract is worth $.50 for every $1.00 that the stock price rises. If the Delta is $1.00 then you get $1.00 per contract for every $1.00 rise in MSFT. The Delta will rise as the stock price gets closer to the strike price. The Delta of the SIRI $1.00 Dec strike is $.09, not a very attractive reason to buy call contracts. But If someone who owned 100,000 shares felt the price would stay under $1.00 by the 3rd week in Dec 2009, he/she could sell 1000 contracts at .05 per contract and collect $5,000 worth of premium.

Are you asleep yet? So am I. There are many more factors that could come into the equation with this explanation but the basics are there for you to make up your own mind. I am not saying that any or all of the options are traders writing covered calls. For all I know or even care, every contract is bought on bullish sentiment. It is just another angle to consider.

Here is my take on the direction of the stock price. I really don’t have a clue where this stock will be by the end of the year or thereafter. I have said many times that it will need a good catalyst to drive it up further. When it will happen is a mystery but I do think it will happen.

Trading options is a very high risk/reward deal. You are effectively purchasing nothing but air when you execute an options trade so be careful and please be educated. As far as the curious call options activity for SIRI goes, that’s all it is to me; curious. It’s curious that Sirius is experiencing a great deal of activity that goes deeper than the plain vanilla stock. And I like it.

Disclosure: Long SIRI, no positions in MSFT.

Comments

[Not Surious:]

Any thoughts on the reverse split? Anyone?

Jun 03 10:27 AM

[jmsithy:]

yeah if this stock goes D-listed and it looks like with it being downgraded if it does be prepaired not saying it is right now / but it does not look that good for the present for this


On Jun 03 10:27 AM Not Surious wrote:

> Any thoughts on the reverse split? Anyone?

Jun 03 11:08 AM

[jmsithy:]

this is why this stock is manipulated no one wants it to reach the strike price by that date

Jun 03 03:46 PM

[connorport:]

My question is this then if your theory is right. Why not buy back to cover? Most of these covered calls would most likely have been sold @.15 to .25 so now that its bottomed again then why not buy them back to cover and wait for the next earnings run?

Jun 04 09:50 AM

[connorport:]

At least some would be and that would wipe at least a few off the board which hasn't happened yet so my thought is that these are bullish buys at what is probably the cheapest they may be this year if Q3 bears the fruit its supposed to.

Jun 04 09:53 AM

[relmar2003:]

Gino, your 100 percent wrong. No downside pressure being created right now for covered calls. The volume is insignificant. Only dumb options writers taking advantage way too early of the new $1 stike offering. Sucker bet right now. No reward to get sell at .10 cent call. What, buy it back for .05 cents? Hold your shares till Dec for only .10 cents a share? Yea right. Go back to the drawing board.

Jun 04 10:09 AM

[connorport:]

Relmar, If you think about it like this it may make more sense. I purchased 50k shares at .11. If i sell options at say .10 then i only have a penny in each share should they expire. This would be the bearish sentiment from the owners of the stock and as you said a suckers bet from those who don't own it as they are equal. In this aspect i would have nearly all my money back if the ship sinks but would be guaranteed a dollar at least if she should run. You can always chase the value upwards if it did but i think this is the wrong time to sell short. The time was when it hit .63 when you could fetch up to .25 for those 50k shares and buy back to cover for .10 leaving .15 on the table and .04 profit guaranteed and 50k free shares. You could also take that $5000 you may fetch today to buy at .33 now and acquire and additional 15000 shares with the cash to hold for the run.
What were not seeing here is interest reduction which would conclude buying back to cover taking those shares off the board. Its still growing.


On Jun 04 10:09 AM relmar2003 wrote:

> Gino, your 100 percent wrong. No downside pressure being created
> right now for covered calls. The volume is insignificant. Only
> dumb options writers taking advantage way too early of the new $1
> stike offering. Sucker bet right now. No reward to get sell at
> .10 cent call. What, buy it back for .05 cents? Hold your shares
> till Dec for only .10 cents a share? Yea right. Go back to the drawing
> board.

Jun 04 04:56 PM

[relmar2003:]

conoport, your right. I agree with your post. That is a great options play. Makes me think Gino doesnt understand how to best utilize writing covered calls(always write them after a huge surge, never on the down) or hes trying to get us to write them too early, thus negativing a huge advantage of writing them later. No reward to writing them now. ZERO.

Jun 04 09:17 PM

[relmar2003:]

Im going to laugh when I write them for my core at .63 cents for probably .35 cents, give or take. If I can wait even more, I can get them at .75 or .80 cents, maybe for .50 or .60 cents a share. If you bought shares at .17 cents(my core) and .30 cents, your going to be guaranteed double your money even if the stock price went to zero cents. LOL LOL
So go ahead and sell those .05 cent calls, to buy back at , o thats right, most retail brokers dont allow anything but .05 cent trade increments at those levels. So for .05 cents your risking from $1.06 to infinity. TERRIBLE risk reward.

Jun 04 09:21 PM

[Chris77:]

Clearly someone is writing calls for a profit, but this article misses the point that someone else is BUYING them. It doesn't necessarily mean the call writer doesn't expect the stock to hit $1.00, it means they would be happy selling at that level, which from the current share price is a triple bagger! If the stock doesn't rise above the strike, they sell again and lower their cost basis. A .05 cent return for the call is a 15% profit based on a stock price of .33 cents, wither called away or not. ANYONE that owns this stock and is planning on keeping it long term should be writing these options on their shares. The author of this article can't invest his way out of a paper bag based on this article.

Jun 06 10:36 AM

[CoolHead:]

Relmar2003 and Connorport,

I agree with you two that this is a much better play. Reduces the downside risk and raises the possibilty of more gain.

Screw the .05 cent calls!

Jun 06 10:48 AM