By now, my position on Sirius XM (NASDAQ:SIRI) is quite clear. I think the stock is dead money. In fact, I think it will go down. And, for the moment at least, my prognostications about SIRI's performance appear spot on. That said, I must make two important points:
- Often, being "right" in this business is a fleeting proposition. Consider Netflx (NASDAQ:NFLX). For months I was technically "wrong" as the stock drove past $300. I opened a short position in the stock via long puts over the past two days, as it broke $90. Only time will tell if, once again, my long-term bearishness proves prescient and provides profit. While I've nailed SIRI since late July, save the jump from its lows, it could just as well nail me in 2012.
- To really profit, you must act on your conviction. I've been preoccupied with that subject lately. But, not only must you act, you must determine, given your circumstances as a trader and investor, if it makes sense to act.
The purpose of this article is not to make the case that SIRI will depreciate; rather, it's to explore whether or not you should act if you think it will.
With a low-priced stock like SIRI, It helps to have the ability to trade considerable size if you're looking to get on the short side via the stock. Consider the possibility that the stock drops $0.15 from $1.65 to $1.50, a 9.1% decrease using Thursday's close of $1.65. Percentage-wise that's nice, but in real dollars (or cents) it might not translate to meaningful profits for the average retail investor.
I realize that what you can pull off varies from broker to broker and account situation to account situation so I use general terms to run the numbers.
If you have $5,000 at your disposal, you can short about 3,000 shares of SIRI. That 9.1% drop or $0.15 profit per share translates to a gain of $450 or a 9% return on your investment. If it happens overnight, I guess it's a good move, but odds are it will not. The longer you hold it, the more you spend in margin costs and tied-up capital waiting for that 9% return.
If you have $50,000 at your disposal, however, you can, theoretically, short 30,000 shares. That 9.1% drop generates $4,500 in gross profits for the same 9% return. Of course, margin costs rise as the dollar figure of your short position does.
You can look at this several ways. One school of thought says that 9% is 9% and $450 to somebody with $5,000 to throw around is the same to $4,500 to somebody with $50,000 burning a hole in their trading account. While perfectly rational, I don't quite view it that way.
I would much rather put my $5,000 to work elsewhere instead of trying to grind 9% out of a short sale of a sub-$2.00 stock. Had I put my $5,000 toward a long play on, say, Tesla Motors (NASDAQ:TSLA) prior to earnings, my $5,000 could have snagged 173 shares of TSLA at Tuesday's closing price of $28.88. At Thursday's close of $32.46, you would be sitting on a 12.4% or $619 profit, on-paper, without concern over margin. You knew TSLA would move around its earnings report, therefore the trade came with greater certainty that you would not get stuck trying to squeeze water out of a rock.
In other words, you have a large universe of stocks to choose from. You likely, at any given time, hold varying levels of conviction towards different ones, yet, if you're like me, you have a limited amount of money to trade and invest with. In that situation, you need to think about the likelihood you can get in and out of a trade or see the results you want from your investment in a satisfactory amount of time. With that mind, if I had $5,000 and only two choices, I would go long TSLA and not short SIRI.
Consider the outcome of expressing your bearishness using put options.
For example, at Thursday's close the ask price on a SIRI December $2.00 put was $0.38. You could grab 131 contracts with $5,000. Assuming a $0.15 drop in the stock price, the CBOE options calculator puts the price of that put at $0.50 30 days from now. That's a rough calculation affected by several variables, but, for the sake of this exercise, it will suffice. That $0.12 move turns a $1,572 profit in 30 days.
That said, if you expect SIRI to trade closer to or below $1.50 come December, put options might be the better way to play it.
Ultimately, my objective here was to get you thinking about something I constantly consider. If you have limited capital, but unlimited choices you cannot put money into all of them. That's the primary reason why I don't hold every position I write about. It's simply not financially possible for me to do so. In addition to managing entry, exit and most importantly, risk, you also have to consider if you should pass up one strong conviction play to go after another that's more worthy of your time. Or if you should look at multiple ways (short sale v. put options) to skin a cat.
Disclosure: I am short NFLX.
Additional disclosure: I am long TSLA.