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Every Friday, I write an options column or two that takes highlights from the work of three key Seeking Alpha options contributors and expands on it.

Part of the purpose of that article is to consider ways to react to notable options activity. I also write the article to help explain the ins and outs of options trading, with a focus on how everyday traders and investors can use options to mitigate risk, generate income and speculate on stocks.

In his Thursday column, Frederic Ruffy highlighted what he noted as "Bearish Activity" in Sirius XM (NASDAQ:SIRI) options:

(SIRI) adds a nickel to $1.78 and SIRI Jan 2 calls are the most actively traded equity options contract through midday Thursday. Volume is more than 40,800 against 274,317 in open interest, which is the biggest OI position in SIRI. The top trade is a 3054-contract block on the 30-cent bid and coincided with a 3054-contract block of Sep 2 calls at the 12-cent asking price. The spread, at 18 cents, appears to be rolling from Sep 2s to Jan 2s and possibly part of an overwriting strategy. The same spread traded at 17 cents, 1087X on ISE, where sentiment data is consistent with a roll out (buying back Sep to open in Jan – customer account). Sep 2 calls on SIRI have traded more than 13,000 against 47,714 in open interest.

Fred writes his column prior to the close, therefore he's a bit off on SIRI's Thursday closing price, which was $1.86.

Nevertheless, here's an easy translation of what Ruffy highlighted: More than one actor in the options market is writing covered calls against his/her SIRI position. The Options Industry Council explains when an investor might employ a covered call:

Though the covered call can be utilized in any market condition, it is most often employed when the investor, while bullish on the underlying stock, feels that its market value will experience little range over the lifetime of the call contract. The investor desires to either generate additional income (over dividends) from shares of the underlying stock, and/or provide a limited amount of protection against a decline in underlying stock value.

In other words, if you believe that, over the life of the call (in this case heading toward year's end), the stock will not experience upside to the extent that it passes a particular strike, you sell a call option at or around that strike to generate income as your underlying long stock position remains static.

In the case of these particular trades, if SIRI gets to $2 and up to or past the call buyer's breakeven point (the strike price of the call plus what the call buyer paid for the contract), the call seller stands to have his shares called away. Simply put, he/she will have to sell 100 shares of SIRI to the call holder for $2 each for every contract exercised, regardless of market price. Any appreciation past $2 represents money left on the table, in the simplest general terms. As such, typically when you write covered calls, you do not expect to get your shares called away or you are willing to part with them at the strike price.

I guess if you opened your SIRI position at pennies per share, that might make sense, but I don't think that's what is going on here. And, if it is, the trader will leave plenty of cash on the table if SIRI goes much past $2.00, let alone flirts with or passes its 52-week high of $2.44.

What's more interesting is the sentiment of these traders, who presumably hold considerable long positions in SIRI stock. Do they subscribe to the notion that macro conditions will keep SIRI down, and this the somewhat bearish play? Or do they believe that Sirius XM will, for one reason or another, keep SIRI down for the next several months? Do they not expect another breakout until November when Sirius XM makes its next quarterly report? If so, will they close their positions prior to the call? And, what if the stock runs ahead of earnings as it often does? That makes the above-mentioned positions tough to close without taking a hit. The beauty of following the options market is that generates these and many other interesting questions about companies and their stocks.

Or maybe the traders who appear to have capped appreciation in SIRI between now and around the end of the year at $2.00 think some sort of nefarious short selling conspiracy theory is at work? If you think this is a possibility, I urge you to read this excellent article by fellow Seeking Alpha contributor Ian Bezak before you consult your mental health provider (this comes from somebody who has been in as much therapy as Howard Stern). The following three paragraphs provide a preview of what is one of the better articles I have read on Seeking Alpha to date:

Sirius was "cellar boxed" because it was a debt-ridden company with no track record of profitability. The economy improved in the later-half of 2010, the company stepped up its operating performance and began generating profits and the stock more than doubled. Now the economy has entered a tailspin and Sirius has dropped sharply, just as forecasters such as myself predicted. Blaming "naked short sellers" is like looking up at the sky and muttering whenever it starts raining, rather than looking at a weather forecast and packing an umbrella if necessary.

Investors, particularly when group psychology comes into play in widely-held stocks such as Sirius, like to make their stock into a loyalty test. If you buy the stock or write positive things about it, you get to be part of the club. If you sell your shares or predict negative things for the company, you are lumped in with the bad guys. All rationally is eliminated as speculators trade their stock on pure emotion. Just as Dendreon (NASDAQ:DNDN) bulls did before, Sirius shareholders are blinding themselves to the fundamental economic headwinds that are sending their stock lower.

By claiming their losses are due to a phantom conspiracy rather than hard economic facts, a shareholder can shift the blame from their own bad judgment to mysterious outside forces. Don't fall for the trick. Whenever you hear claims that a company is being sunk by naked short selling, the truth is that poor management performance is the probable culprit.

That last paragraph really says it all. In investing as well as life, humans tend to blame outside forces for their own mistakes or poor judgment. Sky. Rain. Muttering. Or as the late Elliott Smith wrote, "... without an enemy your anger gets confused."

Smart traders got out of their long positions when SIRI's chart broke down ahead of earnings. Emotional loyalist longs held, blamed everybody and everything but themselves, set out to encourage one another to average down (except in the case of the many purported SIRI penny stock zillionaires) and put the collective gaggle of diehards in the position to be left holding the bag as the competition innovates and Sirius XM stagnates.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in SIRI over the next 72 hours.

Source: Some Options Traders Expect Limited Upside in Sirius XM