Daily Stock Market Equity and Options Trading Commentary

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Sunday, July 26, 2009

Using Options to Get a Sirius Discount

If you're bullish on Sirius XM Radio Inc. (SIRI), you may find this post worth it. There are several ways I have been accumulating shares of Sirius while it has been trading in the 0.35-0.42 a share range. To understand this post you'll need somewhat of a background in stock options; to learn more check out my option trading E-Books.

Sirius Discount Option Strategy: It requires some patience, but the next time Sirius is up 5% or more, take a look at the call options for the December or January 2010 $1 strike. Sometimes the volume on these contracts is huge (when the stock is up nicely), and the bid is at 10 cents a share and ask at 15 cents a share, but most of the time I see the bid at 5 cents, and the ask at 10 cents. Using a similar strategy (didn't write the options out on the stock until 2 weeks after purchasing), I was able to pick shares up for 6 cents a piece, and write out the December $1 call option for 5 cents a share. My cost before commissions is a penny per share.

Today, If you could buy the stock at 40 cents a share, and receive 10 cents a share for the call option, you've lowered your cost by 25%. The question is - what if Sirius gets on a Sirius rally and blows through $1 a share? I guess I would be pretty disappointed, but then I'd most likely remember I tripled my investment. I know a lot of people which have bought into Sirius stock while it was $4 to $5 a share, and that's not to mention the XM shareholders from a couple years back. This strategy has allowed me to cost average my position down on Sirius, while giving me a great downside protection.

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