As with each article I write on SiriusXM (SIRI), I disclose that I have sold January 2012 $3 covered calls against a majority of my long position. After one of my recent articles, I received a personal message asking which calls I would recommend for his current Sirius position. At the current time, and based on the objectives of the sender, there really weren't any that fit with his objectives and his views on where the share price was heading.
Many view the writing of any calls - either covered or naked - as a negative or bearish view of the company and its stock. I am not bearish on the stock and have always found this blanket view difficult to comprehend. Since Sirius has no dividend, I use far out of the money calls to generate some current income on my positions. I recognize that I might limit some of my upside appreciation, but chances are that I would have sold some or all of my position if the share price exceeded the strike price, and would have been quite satisfied with the gain.
However, the sender did force me to take another look at some of the prices and returns available on an option strategy that would meet my risk tolerance and investment objectives. What I found seemed to be a relatively low risk opportunity to generate a return in the 50% range over a 16 month period. The size of the return coupled with my perception about the level of risk led me to take a second look.
I have noted on a number of occasions that I consider Sirius a speculative holding. It carries a high P/E ratio and any stumble with subscriber growth is likely to hurt the share price. Regardless, the company has been growing subscribers while steadily improving its balance sheet, building cash and improving cash flow. As the price has pulled pack from the $2.44 level reached in late May to its current level in the high $1.60's to low $1.70's, my perception of the risk has decreased.
Mel Karmazin, Sirius CEO, will be speaking at a Bank of America Merrill Lynch conference on September 14th. I do not foresee any negative revelation coming from the conference presentation and there is always a chance that some positive bit of news will be revealed. Investors can be fairly certain that he will echo many of the statements made on the last several conference calls. He is likely to mention positive earnings, a large cash balance, increasing free cash flow, manageable debt levels, freedom to increase prices in 2012, the benefits of 2.0 and the potential uses of the growing cash balances.
Taking all of the above into consideration, it seems that there is minimal downside risk on the share price and there is a strong probability that the share price will be above $2 by January 2013 options expiration. By purchasing the shares for $1.71 and simultaneously selling the $2 January 2013 option for $0.40 (the current ask on the shares and the current bid on the option) there is a net cash outlay, excluding commissions, of $1.32 per share. If the shares get called as I expect, the return is slightly more than 50% over the next 16 months.
Disclosure: I am long SIRI.
Additional disclosure: I have $3 January 2012 covered calls against most of my Sirius position. I am likely to initiate the buy stock/sell option discussed in this article at any time after the article is submitted for publication.