A Developing Special Situation in SIRI

| About: Sirius XM (SIRI)

An upcoming event bears watching for Sirius/XM (NASDAQ:SIRI) stock and presents an interesting opportunity for option traders. The contract of Howard Stern with the company is due to expire on December 31, 2010, and whether Stern renews or not with the satellite radio company is up in the air, to say the least.

Why is this important to SIRI? Well, Stern certainly brought in many listeners and subscribers to the company -- and the decision as to whether he resigns with Sirius, goes on to another media delivery format such as the internet, or retires may have a big influence on the company and its shares.

Love him or hate him, Stern certainly boosted SIRI stock when it was announced he was coming there in 2004. Take a look at the SIRI long-term monthly chart below:

SIRI Monthly Chart
dtw090910sirimClick to enlarge

You can see the stock jumped from the $3 area to above $9 in the months following this announcement. Subsequently, Sirius also ended up merging with its biggest rival XM. Signing Stern and the subsequent subscriber and exposure boost it gave Sirius is one of the catalysts for causing this merger.

SIRI stock has basically been in the doldrums for some time now -- it hasn't traded above 1.50 since mid-2008. Some of this is due to a large debt of $3+ billion. The costs of establishing a global satellite radio network are certainly not cheap. The stock also has a large number of shares outstanding, almost 4 billion. Taking a look at the recent chart below, you can see that SIRI shares have mostly traded in a $0.90 to $1.10 oscillating range around $1.00 recently.

SIRI Daily Chart


The actual numbers of SIRI ratings and subscribers are somewhat difficult to obtain, but it's generally acknowledged that Stern has the #1 show on the radio channels -- some would consider him the key "app" of satellite radio. Additionally and importantly, a large number of his listeners are presumed to subscribe to SIRI (via raio and/or internet) for his show primarily and many will likely cancel their subscriptions if he leaves the satellite radio format. The combined company has sunk a large amount of money into other radio properties such as the NFL, Oprah Winfrey, and Martha Stewart, but the actual benefits of these deals in terms of subscribers and net revenues/profits doesn't seem great at this time.

The contract with Stern expires at the end of the year, and it's really not certain at all what will happen. Stern has talked negatively on-air about the chances of his staying with the company, yet negiotations are likely ongoing. He has also mentioned going out on his own to deliver content directly to his fans, through internet, sim cards, other mobile platforms, etc. Another option is retirement from the business.

To some degree, the outcome of this situation resembles a biotech pharma with a big drug trial result pending or an FDA decision or some such. It should have a large influence on the stock's price, even for quick pop up or down. I would even question whether SIRI will stay out of a restructuring (where they may wipe out the common stock and reorganize debt), if they fail to re-sign Stern.

For option traders, this represents a potential opportunity given that we know the end date of the contract is the end of the calendar year. One would want to consider banking on a big move in the stock sometime between now and the end of the year. Looking at the SIRI options, with the stock at 1.05 currently, the October 1.00 Straddle (buying both the Call and the Put) is trading 0.10 by 0.11 and expires October 16th, around a 41% implied volatility. The December 1.00 Straddle, which expires Dec. 18th, is trading 0.18 by 0.21, around a 45% implied vol.

Note that the October straddle at a value of 0.10 is right around the current range of the stock (the 0.90 to 1.10 recent range). The December straddle is more expensive, but this is expected given the longer amount of time remaining and its proximity to the end of the contract. There are no November options currently, but they should be released when September options expire. Basically, these options are fairly reasonably priced, in my view -- meaning you won't be paying through the nose to buy these straddles.

The question for traders is how much SIRI stock will move and when the status update of the contract announcement occurs. Despite the recent tight range and decreasing volatility in the shares (seen in the Bollinger Band Width Indicator dropping in the above chart), this stock can certainly make big moves. For example, it's nearly doubled in calendar year 2010.

I would estimate that the shares could quickly pop 0.20 to 0.50 higher if it is announced that Stern signs a new contract (of which the terms will likely be more favorable to SIRI than his previous one, given the current economic environment). How much will they drop if he is dropped from the company? Harder to say, but I wouldn't be surprised to see it go to 0 in a restructuring/bankruptcy, but that make occur over a longer time period.

Disclosure -- I hold no current position in the stock or its options. But I am considering buying the October, November, or December straddle in the near future.