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I'm purposefully toning down the bullishness surrounding SiriusXM (SIRI) here, as I believe it is very important to impart caution to all who have been following along with me.

One of the most important things an investor can do is to explore the "bad" side of things-- think of the "maybe," the "uh oh," the "oh no!" and the "oh ... you know what" scenarios. The very best thing one can do when investing is to understand your downside, as much as your upside.

It's so much fun to get caught up in a bull run and just let the imagination run wild, isn't it? Visions of overnight gains or a massive buyout for a 50% premium coming through the pipes gets people dreaming. That new boat, new car, new home, new life... (or maybe new Snickers bar if you only have 1 share), can cause you to salivate involuntarily. It's human nature to block out the "uh oh" and focus on the "woo hoo!"

Right now? Focus on both. Take both equally into consideration. Put aside your excitement of the past week and focus on the week ahead. Form your expectations and devise an appropriate plan of action. It's no secret by now, I have been bullish on SiriusXM both short term and long term. But I have my concerns for the coming week that I would like to share.

It is the world's worst kept secret at this point that on March 6th, Liberty's (LMCA) restrictions are removed and it may take a controlling stake in SiriusXM. If you're in either stock, you know this. If you're not in either stock, you probably know this. Because of this, we are entering a very important week for SiriusXM's price in the short term. For those looking to trade there is a possibility of making large gains, or printing out huge losses. Be careful.

Monday is the last trading day before the restrictions are removed. I can't see the share price decreasing on Monday. I just can't. With all the hype surrounding the cutoff date, with new auto sales skyrocketing, and with nothing but noise from the majority of the detractors, it will take something major to stop the share price from appreciating on Monday. With the last value of $2.32 in after hours on Friday, I see an upside of at least 5 cents to $2.37, or 2%, and a high estimate of 18 cents to $2.50, or 8%. I am not worried about Monday without big macroeconomic news.

Tuesday and beyond, the magic 8 ball says "future uncertain." This is where the most speculation comes in, and this is where we must all make a decision. What do you think is going to happen? I will outline two possible scenarios, and my expectations of the stock's performance for each. This expands upon my sentiment from my most recent article here.

Scenario number one:

Tuesday comes, and there is action by Liberty immediately. This, of course, is bullish. I see no downside to this scenario and differing levels of upside, depending on what Liberty might do. Action by Liberty could easily add 10% to 30% to the value of the stock at the time of announcement. If you think this is what will happen, of course you will hold anything-- both long term and short term. This is the only scenario I can see where "everybody wins" to some degree. It is arguable if people will win as much as they expect, but in this case, everybody wins something.

This does not mean Liberty has to do a buyout, but it simply has to do or say something positive with regards to SiriusXM. Silence is not an option in this scenario. If you expect silence, move on to scenario number two.

Scenario number two:

Tuesday comes, and there is no action by Liberty. Liberty is silent, and continues to be silent for more than a couple of days. This is my bearish scenario, and I think a large amount of downside could result from this.

People expect scenario one. If scenario one does not materialize, then many people will exit their positions. I see significant downside here for the short term-- from 15% to 20% from Monday's close. We could retrace to the $2 level if there are enough weak hands. This is not me saying that that is appropriate valuation, but we all know very well how the market overreacts.

If this is what you expect and you have strong conviction in this, you have a couple of choices. You should consider exiting your position at a point you are comfortable with on Monday and seeking re-entry as scenario two plays out if you remain bullish on the company itself. A long holder with a Monday sale of, say, $2.50, selling then buying on a retrace to $2 (20% drop) can increase their position by a whopping 25%. It is up to you how much conviction you place on your sentiment here, as to how much you should trade and how much you should hold, as well as your exit and re-entry points.

Here's what I am doing :

I have two portions of my SiriusXM investment.

  • I have roughly 70% held long in SiriusXM shares. I am HOLDING these shares. I will not be selling them.
  • I have roughly 30% held long in SiriusXM March $2 call options. I am SELLING my initial cost on these, but letting the profit ride. My cost basis is an average of 15 cents each.

Here's why :

I expect news sooner rather than later. I see no reason for Liberty to not make a move now, while the share price is as it is. I believe we are undervalued at the moment, and as the year goes on, we will find guidance increased and numbers which beat guidance time and time again. It benefits Liberty to make a controlling move, and eventually gain access to the NOLs as soon as possible to lock in the cheapest price possible.

That said, I understand the possibility of this not happening. Liberty may choose to wait in silence, especially knowing the share price will suffer because of that and the company can pick it up for 10% to 20% less. My March $2 calls with a 15 cent cost basis have an expiration date, and I would hate to lose out on the principle I invested if Liberty chooses to stay quiet.

Long term I am bullish on SiriusXM for the year, so there is no need to sell my long term position on short term sentiment. I do not see the stock dropping off and staying there, in any case.

Short term I will seek re-entry with some or all of my cash from sale of the call options. I'll entertain the June expiration date and likely the $2 strike price. This gives me enough time for the quarter 1 conference call and earnings to come through, as well as March, April, and May auto sales data.

Ask yourself what you see happening. Consider the downside as much as the upside. Focus and proceed with caution, and get ready for what could be a very interesting week.

Source: SiriusXM: Be Sure You Play March 6th Correctly

Additional disclosure: I am long SIRI March $2 calls which I may sell at any time.