Should Sirius XM Options Traders Be Wary?

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Zacks Equity Research has been quite vocal lately about media stocks it’s not particularly fond of at the moment.


On May 25, Zacks asked if Entercom is “positioned for a slump.”

Now, it’s warning investors in Sirius XM Holdings Inc. “to pay close attention to the stock” based on recent moves in the options market.

What’s the concern?

Sirius XM looked at “implied volatility,” which shows how much movement the market is expecting in the future.

Options with high levels of implied volatility suggest that investors in the underlying stocks are expecting a big move—either up or down.

“It could also mean there is an event coming up soon that may cause a big rally or a huge sell off,” Zacks notes.

This “event” is still highly expected to be Sirius XM’s eventual takeover of Pandora Media, after two rounds of kicking the tires that saw Sirius XM back away from a merger acquisition.

Zacks looked at the Jan. 18, 2019 $10 Call for Sirius XM, and it had some of the highest implied volatility of all equity options on Tuesday (5/30).

Yet, implied volatility “is only one piece of the puzzle when putting together an options trading strategy.”

Zacks’ look at Sirius XM is, however, another sign that investors expect an announcement regarding Pandora soon.

On May 24, analysts at Vetr downgraded its rating on Sirius XM Holdings Inc. to “Hold,” from a “Buy.”  The Vetr crowd’s average target price for Sirius is $5.37. This compares to the average analyst target price of $5.23. Similarly, Wunderlich downgraded SIRI to “Hold,” from a “Buy.”

What’s perhaps most notable for Sirius XM shareholders is the interest in the nation’s only satellite radio company from a protege of Warren Buffett. According to Barrons, Ted Weschler “has apparently directed the purchase of $131 million more in stocks that track Sirius XM Holdings.”

In April, Weschler steered Berkshire to buy nearly $250 billion of Liberty Media  shares that track Sirius.

Sirius XM shares spiked on Friday (5/26) as Pandora chatter increased in volume; shares have rebounded from $4.73 per share on May 17 and were at $5.30 in mid-morning training on Tuesday. However, volume was far below average coming out of the Memorial Day holiday weekend.

 

“Clearly, options traders are pricing in a big move for Sirius XM shares,” Zacks says.

But, what is the fundamental picture for the company?

Zacks also has a “Hold” rating for Sirius XM.

“Given the way analysts feel about Sirius XM right now, this huge implied volatility could mean there’s a trade developing,” Zacks says “Often times, options traders look for options with high levels of implied volatility to sell premium. This is a strategy many seasoned traders use because it captures decay. At expiration, the hope for these traders is that the underlying stock does not move as much as originally expected.”

While Sirius XM has seen a boost in its stock price in recent trading sessions, it has been a dismal 30 days for Pandora Media.

On May 8, Pandora shares dipped below the $10 threshold and have yet to recover. In mid-morning trading on Monday, shares in P were at $9.25. Pandora shares have not been so low since spring 2016.