The world is full of people with a strategy on how to play a stock, but developing a strategy is not a one size fits all business. People invest in differing ways, with differing amounts of money, and with differing goals. You have traders, those that buy and hold, and those that play both sides of the market. None of this is right or wrong, it is simply each persons own strategy combined with the amount of risk they want to take.
The options market presents an interesting to strategize regarding a stock, but getting into options is not something that should be taken lightly, or something that people should jump into unless they understand the additional risks associated with options. In simple terms options work on contracts. One contract is 100 shares of the stock. If you are doing calls you are paying someone for the right to purchase their stock at a set price and within a set time-frame. Puts are the opposite. If someone wants to hedge their position, options is a method by which to do it. The key is understanding that you are insuring yourself, but paying for that insurance through additional commissions and by limiting your upside or downside.
In my investment history I have played options and even commodities with some frequency on other equities. There are times that I have been quite successful, times that I wished i didn't make the options play, and time I had my contracts expire worthless and lost out on the commissions for the transaction.
Sirius XM has many passionate investors. Many seem to have a burning desire to somehow always be in the stock. Many have simply employed a buy and hold strategy, while others love to trade the stock on a daily basis. The strategies for these varying investors can be quite different. A trader wants movement, and loves ranges. That is how Sirius XM is currently trading. The range sits between $0.90 and $1.10.
Rather than going out "naked and doing pure calls or puts, there is another method, that employed properly can fit within a long term holders strategy, offer protection, while not putting such a stringent limit on the upside potential. How many investors would love to sell their SIRI stock at $1.50. Traditionally someone who is long a stock and is looking to protect themselves may consider buying puts. The downside of such a transaction is that it puts a cap on a potential run of a stock with strong support above $0.90 and an upside that could take it to the top end of the trading range at $1.10. In essence, you would be spending commission money to hedge your investment for what would equate to a ten cent move downward. If the stock goes down your stock is worth less and your puts worth more. However, with such a narrow range, you are basically giving up money for insurance that, if you are long the stock and believe in the company, for what will most likely be minimal protection.
So what is an investor to do? One solution is writing covered calls. A covered call is a call option that is backed up by the shares you own. For example, if you own 10,000 shares of SIRI, you would have the ability to write 100 covered call contracts. The August call contract for $1.50 sells for $0.01, and the September for $0.02. Thus, if you wrote an August $1.50 covered call on SIRI, someone would pay you $100.00 for the right to buy your SIRI for $1.50 per share at any time between now and the third Friday in August. For the same $1.50 covered call in September you would receive $200.00. Simply stated you are getting paid to agree to sell your shares at $1.50 should the buyer want to exercise their right. Your upside is $0.53 from current levels + the $0.01 (or $0.02 depending on the month you contract) less the commissions you paid. That would be over a 50% gain. Now for clarity, if the stock is trading at $1.60 between now and when the contract expires, you have to sell your shares for the $1.50 if the buyer decides to exercise the option. One special note is that because you have entered into a contract with these shares, you can not sell these shares during the contract period.
The point here for the buy and hold type investors is that you can use your current holdings and leverage them to make money each month. Unless SIRI goes over the $1.50 strike price, the contract will likely expire worthless. The buyer who bought you covered calls is out the $100 or $200 they paid (that money is yours and was paid up front), and you retain the stock you were holding anyway. You can then select another month and write the covered call contracts again.
If you would be happy selling your stock for $1.00, the August $1.00 price is currently $0.06 (100 contracts would bring in immediate cash of $600) and the September is at $0.09 (immediate cash of $900). Thus, you would essentially be agreeing to sell out for either $1.06 or $1.09. This means your stock is much more likely to reach those numbers, and this is why these calls trade for more money.
A savvy investor who has a good feeling about their position can often write calls month after month without ever having the contracts exercised. This means they are getting cash each month for an equity that they were planning on holding anyway.
It should be clear here that the options market does have greater risk than than the traditional markets, and such a strategy does is not proper for everyone. Investors should seek out the advice of a qualified and certified financial adviser prior to any investment decision, and especially before getting into the options side of this business. All to often people jump into something without properly understanding the costs, risks, and limitations of their action.
Position - Long Sirius XM Radio