Playing The Sirius Yo-Yo

| About: Sirius XM (SIRI)

Many of you have been reading my articles focusing on Sirius XM (NASDAQ:SIRI) and how I use options and other strategies to continue to make money while remaining long on the stock. Sirius has been a constant yo-yo over the past months which means writing covered calls is the way to go.

SIRIUS XM Radio Inc. (<a href='' title='Sirius XM Holdings Inc.'>SIRI</a>)

As I wrote about back on the 4th, there were a few ways you could have played the talk of a potential Liberty (NASDAQ:LMCA) Sirius merger. I ended up doing what I have been talking about for months: Wrote covered calls against most of my position that were out of the money.

In the previous article, I provided an example of how to turn a profit out of the hype and still remain long on the stock. The example I used was owning 10,000 shares of Sirius with a $2.10 cost basis, and to write 100 March 17 2.50 covered calls at $4 an option for a premium of $400. The scenarios that could have happened were described, what ended up happening was option one: the calls expired worthless and if you followed the strategy, you pocketed the $400 premium.

This happens almost 75% of the time when writing covered calls OTM, they expire and you keep your shares and the premium. Owning 10,000 shares with a cost basis of $2.10 ($21,000), making $400 may not seem like a lot but in reality you would have made a 1.5% estimated (after fees) ROI for a 2 week investment (or 39% annually!).

So besides the fact that this stock (and others as well) continue to (illogically) perform like yo-yos, why else is it worth it to write these calls down the road?

Short Time period: Sticking to a short window for writing your calls usually is a huge key to success. I typically do not like to write calls more than 60 days out till expiration unless I am getting a very premium price. Next month's April $2.50 calls look like the March ones did when I wrote the article. Price is at $4 an option ($400 premium for 10,000 shares) and the stock would have to run up 10% in about a month for them to be called. You may be able to squeeze another $1 or 2 per option as there is heavy interest in this option. Again, if option one occurs you would make about a 1.5% ROI, or 18% annually. Not bad.

Profit either way: With a 2.10 cost basis (or below), you are looking at a minimum of a 20% profit if the shares are called, as well as the $400 premium. It is unlikely for the stock to hit $2.50 and stay there by April 20th, it also is unlikely even if it did that you would lose much upside.

However, if you are still worried about losing upside, I suggested purchasing ITM calls to cover any monster gains. Last month, I suggested using the $2 April calls for $33 an option. They are currently worth $29 each, but you still have until April 20th to see if they can net you a profit. Had the stock catapulted to say $3, those options would be worth more than $100 an option today.

If you want to utilize this strategy in conjunction with selling the covered calls against your position, I would look at the September $2 calls at $40 an option to cover your upside against big short term gains. Those are way out (6 months +) and the stock has a few earnings reports (typical good news for Sirius) in between that can drive the price up. Remember, you do not need to exercise or keep these options till expiration; you can take the profit on them at any time if you feel the need!

The point is, covered calls are a great way to hold the stock and earn income as you go along if you are bullish on a stock. You can also use them to effectively reduce your cost basis. I hope many of you utilized this strategy over the last few weeks, nothing better than free money and although there are many stocks out there you can use this strategy, Sirius seems to be the perfect yo-yo for such an idea. I will continue to utilize this in the future as a way to take advantage of the situation.

Disclosure: I am long SIRI.