Every two weeks NASDAQ disseminates the short interest for various equities. The data is in, and Sirius XM (SIRI) has shown a decline in short interest by over 10 million shares vs. the previous period.
Perhaps, but given the recent share price moves, one has to wonder if the shorts covered a bit higher than necessary. The settlement dates above correspond to the trade dates marked below.
It seems shorts have covered these 10 million shares at or near the recent peak of Sirius XM's share price.
While I will not suggest that shorts have been wrong to cover, I find it interesting that shorts would choose higher and higher share prices to cover at. Some people view shorts as the smarter traders, but it seems they covered right before the recent sharp decline, which has brought Sirius XM down by 11.5% from the highs.
But if one considers the long-term trend here, shorts have been covering for the last several months since the end of February when the position peaked at 414 million shares. Why do I think shorts may become increasingly frustrated?
Because if you short Sirius XM right now, you run the risk of shorting into Sirius XM's buyback plan. It's that simple. Now that, as of the Q1 call, the cat is out of the bag and Sirius XM has announced that its $2 billion buyback plan is underway, the longer-term short bet becomes the longer-term wrong bet. While a savvy trader may make some cash playing the dips and pops long and short in the very short term, the critical fundamental issue here is that Sirius XM's buyback should cause long term gradual increases in share price over time, and that works against one holding a short position for an extended period.
While I believe the majority of Sirius XM's short position is hedged, I would not be surprised to see further decreases in Sirius XM's short position going forward. The recent share price dip has given a great opportunity for shorts to "get out" with minimal losses or perhaps even a small profit. If $3.60 was an attractive price to exit for some, I would imagine the $3.20s will be even more attractive.
And that's good news for longs. While recent share price gyrations due to the overall market may induce doubt, I would argue that these are the times you buy. Sirius XM's fundamental story has not changed, and longs and shorts alike should use this market uncertainty to their advantage by adding to longs, covering those shorts.
Additional disclosure: I am long SIRI January 2014 $2, $2.50 and $3 call options.