A serious options play has been made as of Friday October 19th at 12:17 PM. That is, if you consider a short straddle with a 48070 option contract position "serious." At 12:17 PM a player made a very large neutral bet expecting Sirius XM (SIRI) to remain within a specific price window until the November 17th options expiration. The strike price of this bet? $3 per share.
For those unfamiliar with some of the more complex options, a short straddle is a neutral bet with maximum profit for the player when the share price matches the expiration price of the options underlying the play. The play is explained in detail at this link here.
The short straddle - a.k.a. sell straddle or naked straddle sale - is a neutral options strategy that involve the simultaneous selling of a put and a call of the same underlying stock, strike price and expiration date.
Short straddles are limited profit, unlimited risk options trading strategies that are used when the options trader thinks that the underlying securities will experience little volatility in the near term.
So what are the details of the trade this player likely entered into? I dug into time and sales for options on October 19th and found the trade in question. At 12:17 PM a player simultaneously sold 48070 November $3 calls as well as sold 48070 November $3 puts for bid price of 19 cents on the put side and 7 cents on the call side. This gives the player proceeds of 26 cents per underlying "straddle." Because each straddle contract covers an actual position X 100, proceeds were $26 per contract total, minus fees.
This is a "big money" play to most people, considering that $26 multiplied by the 48070 position results in the player receiving a total amount of $1,246,000. While there would be fees for this trade, a large player like this likely has fees which are negligible.
How does this play out to completion for the owner of the position? Assuming the share price on November 17th closes at the $3 strike, the player gets to keep the proceeds and the options expire worthless. For every penny the share price closes away from $3 per share on the expiration date, the player loses $48,070 from the $1,246,000 received. Break even, where the player ends up with $0, is roughly $2.74 and $3.26.
Considering the price of Sirius XM at the time of the trade, which was around $2.89, this play could be considered neutral to mildly bullish. Remember the player received maximum proceeds at $3 per share, or an $0.11 appreciation over the share price at the time.
It should also be considered that this position has "unlimited risk" for the position holder, as if the share price appreciates beyond $3.26 or drops below $2.74 at expiration, the holder loses their entire $1,246,000 amount in proceeds received, and is on the hook for $48,070 per penny moved beyond those two prices. For example if Sirius XM misses on the Q3 conference call and drops to $2.48, the holder will lose their proceeds and on top of that owe an additional $1,246,000. The very same holds true if Sirius XM has a blow out conference call on October 30th or has some sort of event which sends share prices through the roof to $3.52. Losses get worse the further the share price is from $3 at expiration.
Why is this important to consider for Sirius XM investors? While one man's "bet" does not mean the stock will do exactly what that one man is thinking, it can be valuable to understand some of the sentiment from a larger player in the market. Such an options position which requires level 4 options trading and a large margin account is not typically something entered into by a novice. While professionals sometimes fail, it can be assumed that at least one "professional" sees current share price appreciation slowing and stagnating around $3 per share.
Investors should keep in mind that this player does not have to hold this position through expiration and may very well close it out early. If the trade is closed early, investors should take care to watch the current sentiment. If it is bearish, the player is likely expecting prices to drop considerably and pass $2.74. If it is bullish, the player is likely expecting prices to rise considerably and pass $3.26.
It will be very interesting to see how this player fares, and I'll update after November 17th expiration with the ending result.
Disclosure: I am long SIRI.