A Bearish Play on Sirius?

by Beth Gaston Moon | March 23, 2012 9:54 am

[1]Sirius XM Radio (NASDAQ:SIRI[2]) is no stranger to the options pits; its normal daily options volume is well above 13,000 contracts. But on Thursday, the broadcasting company that Howard Stern calls home saw notable demand for intermediate-term puts at the September 2.5 strike.

It appears as though 10,000 of the September 2.5-strike puts were purchased for 42 cents apiece. With the stock trading at $2.27, these are in-the-money puts and are betting on SIRI shares to decline below the breakeven price of $2.08 by the time September options expire. This is roughly 8% below the stock’s current price.

But wait…there’s more.

At the same time this large block of puts were purchased, 600,000 shares of Sirius stock traded as well (also on the buy side). It’s likely that the same investor bought the shares and traded the puts to open at the same time. While a long stock position and a long put position may seem mutually exclusive, there are clear reasons for executing these seemingly divergent trades at the same time.

Steve Claussen, chief investment strategist at OptionsHouse.com[3], said the initiating trader may have executed this strategy in two parts “because SIRI is currently hard to borrow, which means being able to ‘locate’ stock to borrow — and subsequently sell — becomes more difficult and more expensive.”

Buying put options, on the other hand, can express a bearish stance toward Sirius without the complication of holding a traditional short position in the stock. This particular trader may have simply been buying the stock in order to get a better entry price on the long put (taking any delta risk away from the market maker selling these puts). This is a relatively common strategy for investors wanting to purchase large blocks of options. Then, in order to assume a solely bearish position, the investor can simply sell out of the stock, leaving the long put options alone in his portfolio.

SIRI has been on a tear this year, rising 25% year to date. And despite how loudly Howard might complain, the shares are up a whopping 632% over the last three years (though still down about 70% from its December 2004 peak, which came just after the news of Stern’s original contract).

But yesterday’s active traders seem to be expecting the stock to retreat at some point in the next six months, and they placed a sizable bet to reflect this bearish opinion.

As of this writing, Beth Gaston Moon does not own any shares mentioned here.

Source URL: https://investorplace.com/2012/03/a-bearish-play-on-sirius/

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