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Saturday, May 30, 2009

Not the End of the World for SIRI if GM goes Bust. Sirius Option Strategy

As recently posted on my blog, I believe Sirius is due for a slight rally. I was lucky enough to pick up some Sirius Thursday for 30 cents a share, and write covered calls for the December $1 strike for 10 cents a share Friday. This brings my cost down to 20 cents a share. In my opinion, the major reason Sirius has sold off recently is not due to the last earnings report, but because of all of the negative news lately about the auto industry, particularly General Motors (GM) and the likelihood of a bankruptcy June 1. We can look at their charts since May 1 (day Chrysler filed chapter 11), and we can see that SIRI may be a bit oversold on the news.



As of Friday May 29, GM was down 60.93% and Sirius was down 10.25%. However as of Close Thursday May 28, GM was down 41.67% and SIRI was down 17.82%. We can see that on May 21 Sirius seemed to be much oversold compared to GM, on the GM news; it was actually down more than GM. This chart looks as if SIRI buyers have stepped in and are supporting the stock near 30 cents, even as GM is selling off. I take this as a good sign for SIRI, and this is one of my major reasons for stepping in and getting long SIRI here.

Let's face it, when GM files chapter 11 it's not the end of the world for SIRI as Ford (F), Toyota (TM), GM (during restructuring), as well as the other auto companies will still be putting the satellite radios in their vehicles. Not to mention if the "prepackaged" bankruptcy goes better than expected, we may even see SIRI rally. I believe once the bankruptcy is over and done with, SIRI will return to normal trading (more or less tracking the regular indices). The intraday chart from Google (GOOG) on Friday May 29 shows and inverse relationship between SIRI/F and GM. As GM’s loss accelerated throughout the day, both Sirius and Ford’s gains also accelerated (with the overall market).



Below is a Buy/Write option strategy for SIRI (for more information about these strategies check out my blog) that will reduce risk by as much as 33%.
Sirius Option Strategy:

Buy SIRI at or below 30 cents a share, and sell the December $1 call option for a premium of 10 cents a share (the current bid is a nickel but some contracts have been getting filled for a dime a share every day, you may have to be patient or may choose to take the nickel). This would lower your risk by 30%+ on your SIRI shares, and have a chance of making a 400% return if you get called away. You also have the chance of keeping the shares if SIRI does not get to $1+ by December, and as long as SIRI is above 20 cents a share at expiration (when contracts expire) you will have a net gain.

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