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After reading my previous article here, outlining a short straddle options play in Sirius XM (NASDAQ:SIRI) on October 19th, many readers have asked questions about whether or not the initiator of that play could have an underlying position in Sirius XM.

As suggested by SA user Gabriel Borenstein :

(click to enlarge)

The answer to that question of course is yes, they could. If the player is long or short the underlying stock it would affect the returns received by the play considerably and I'll explain both scenarios below. For both scenarios the stock, long or short, will be considered from the time of options sale, or $2.90 per share.

Scenario #1 :

Player is long 4,807,000 shares of Sirius XM stock combined with the short straddle explained in the previous article.

What this does is negates the possibility of loss from the share price increasing. It also brings the break even low point a bit higher to $2.82 per share, with losses at expiration below this share price. The reason for this is the player being long the stock at $2.90 superimposes the gains and losses from the underlying position onto the previous short straddle graph. To save a lot of mathematical explanation, the resulting graph of profit and loss to the player is as follows

(click to enlarge)

As you can see, a play like this has increased profit potential, loses 8 cents protection on the downside, and negates any possibility of loss to the upside. Below $3.26 and above $2.74, this play yields a return higher than someone who is merely long the stock. Above $3.26 at expiration the long holder who has not initiated this play ends up with greater profit.

I'll go on record as saying that I personally like this play better than the next when considering my sentiment for Sirius XM. This is because I see current company performance as strong, the Q3 call on October 30th as being a meet or beat of street expectations, and the possibility of share buybacks strengthening resistance to the downside. All of these factors point towards continued upward movement in the share price through options expiration on November 17th.

Scenario #2 :

This is a contrarian play to the one above. Player is short 4,807,000 shares of Sirius XM stock combined with the short straddle play discussed in the earlier article.

What this does is negate the loss from the share price decreasing. It also brings the break even high point down to $3.08 per share at expiration with losses incurred above this share price. The reason for this is the player being short the stock at $2.90 superimposes the gains and losses from the underlying position onto the previous short straddle graph. Again, consider the play in the following graph.

(click to enlarge)

As you can see, a play like this has decreased profit potential, loses 18 cents protection on the upside and negates any possibility of loss to the downside. Above $2.74 and below $3.26 this play yields a return higher than someone who is merely short the stock. Below $2.74 at expiration the short holder who has not initiated this play ends up with greater profit.

As you can see, this play has far less profit potential but does protect the short holder from some increase in the share price. I find this to be the most unlikely of the three options discussed.

Now we have all bases are covered for this play, naked, short, and long the underlying stock. My personal sentiment on Sirius XM is that the long play described above would be my choice. It yields a considerable return and offers downside protection on the long position of 8 cents in return for sacrificing any upside in the next four weeks beyond $3.26. The great part about that play? A share price of $3 to $3.26 at expiration gives the player $1,730,520 on an investment of $13,940,300. That's a return of 12.4% in 4 weeks time. If your pockets are not as deep, the beauty of this play is that it is completely scalable and retains the same return. It's an outstanding return with a good margin of safety given the current bullish sentiment and momentum behind Sirius XM.

Readers with access to level 4 options trading may wish to consider this play at similar pricing in the coming sessions if available.

Source: Sirius XM Play Has Additional Options