Short interest in Sirius
This post is unnecessarily long, so if you just want the analysis bit, skip down to the 4th paragraph.
The numbers were just released today that the Short interest in Sirius stock has actually increased since the positive DOJ news. So in effect, people are betting against the possible price appreciation in Sirius shares. The short interest in the last 14 days is up 41% to over 137 Million shares short. This is counter intuitive since with positive news, we would expect the price of Sirius shares to increase rather than decrease. But this increase in short position also helps to explain the reason that the stock has actually tanked since the positive news.
Clearly, as most of us know by now, there is a price spread between what the XM and Sirius shares should be trading at if the merger should happen. Technically, once the merger occurs, XM shares should be trading at 4.6 times Sirius shares. Since this is not currently the case, there are many people locking in their bets by shorting Sirius shares and buying long XM shares. But recently, the spread has narowed considerbly and stands at less than 7%. In my opinion, it's kind of a pathetic idea to get involved with this arbitrage now since the spread is so low, but obvioulsy people are doing it.
In this situation we should also expect that XM shares would stabalize or even go up since there would be people buying the shares in order to complete the arbitrage trade. But this has not really been the case, as XM shares have fallen as well. I would say that this is simply because XM is a weaker company, and there are more than enough people willing to sell XM even now because there is a risk that the merger does not occur. So there is little to drive the price up.
But, here is where I try to look into the future and logically predict things.
If the merger is approved then there will be people winding out of their arbitrage trade, so they will be forced to buy Sirius and sell their XM shares. (They could choose not to unwind the trade and simply wait for the companies to do the transfer, but in most cases people who are involved in an arbitrage play choose to unwind the trade themselves.)
So the arbitragers get their 7% and are happy. If approved, they cannot lose this. But with the unwinding of the trade, it would almost certainly force Sirius shares to jump higher. Sure XM would jump too even though people are selling the XM shares, since the two are linked at 4.6 ratio.
With almost 140 Million shares that will be bought soon after the merger is approved, simple supply and demand would cause shares to rise, and rapidly. And remember too that Sirius is a day trader kind of stock, with the low share price and huge float, and it would not be surprising to see a huge swing.
Personally, I'm tempted to buy some XM May call options at either the 13, 14 or 15 strike. It seems like a good bang for the buck.
The beauty of the Arb play:
You short Sirius, and buy enough XM to cover your Sirius short after the exchange of shares. You are guarenteed that 7% (or what ever the arb spread is at the time you BOUGHT).
BUT: The kicker here is that you dont necessarily have to sell BOTH at the same time! As soon as possible after the merger is announced, you cover your Sirius short. Then, you can ride the price up after the positive announment for your XM trade, knowing that you have already covered your short.
What does this mean for the two stocks? As soon as the merger is approved by FCC, the stock will POP just from news. Then within the next 30 minutes, it will pop again from all the short covering going on. Since the merger is at a fixed ratio, Sirius will pop first, and that will cause XM to spike due to the fixed ratio.
But be careful: What goes up, must eventually come down. These two companies, even expecting 3-7 Billion in synergies cannot sustain the pop forever. The investor's best hope is that FCC will announce first thing in the morning. Pop #1. Short sellers cover their shares. Pop #2. Sirius/XM announce consumation of the merger. Pop #3, and XM shares stop trading.
This is all within a single day. Perhaps 1-2 days more of heavy trade and price increases, but after that, prices will fall, and short sellers will jump right back into the mix of things.
Remember: Bulls make money and Bears make money. Hogs get slaughtered.
nice trade talk
That was interesting to read, especially for a stock investing newbie.
Thanks for the info, and I will be watching and reading very closely, but one thing I am definitely keeping in mind, nothing about this merger has been normal, and at this point, nothing will really suprise me. They need to allow this merger to happen on all fronts, and mainly all new competition arising, even a new satellite corp, worldspace, as we recently heard, launching in Europe (which doesnt directly affect the american market, but show growing interest in satellite radio).
Good luck with your investments
Actually, WorldSpace has been around since before XM/Sirius. They just opperate on the other side of the world, so you dont hear about them. They have been over Europe and Africa for years, but they have been unable to get "large" countries to allow them to broadcast until now. They have been broadcasting to several small countries and broadcast shows in something like 17 different languages or something.
Hope everyone has a good friday
I feel merger approval in the air
I think next week is the week, not sure how many times that has been said, but I can feel it coming in the air
I can feel it... coming on the air tonight... oh Lord...
Sorry, 80s flashback...:eek:
Well, it's the next week, and still nothing. I don't think the FCC wants to rule on this at all. I believe the FCC was betting on a DOJ "No-Go", so they wouldn't be forced to make a decision. Now that the DOJ has given the go, the FCC is in a precarious situation. They're basically in th epocket of the NAB...we all know that, especially by how much dough they've been spreading around, and the rediculous amount of time it has taken to get any word regarding this merger.
I feel the FCCis waiting for Sirius to just let the time expire on their agreement with XM, basically withdrawing their bid. Why it has taken this long, is absolutely rediculous...as is the tanking share price of Sirius. I'm not a short seller...never have been, never will be.
I've written all 3 (yeah, i'm in Delaware..small state) of my representatives in Washington, and only got a response from 1...which was basically a "shut-up" type of response...touting the NAB line.
I can only hope, that possibly Sirius will take this to court, if possible, should either The FCC rule "no" or the time expires. It's plain manipulation through and through...and it's making it tough for either company in trying to make any money, as there is no word out on this yet...and people aren't buying the radios.
I have to admit though...the lack of any info coming from Mel or Sirius as a whole has been disheartening to say the least. With all the companies coming out today and just basically saying nothing important at all to make their stock price go up...I feel it's only increasing the amount of tension out there both for consumers AND SIRI holders as well. Just my 2 cents...well, which is basically what my SIRI holding are worth now. :D
Originally Posted by JasonLantz
Yup, and the numbers just came out on Friday (I think) that the shorts have increased by another 20 million shares over the past month.
The more shorts, the larger the chance for a better short squeeze. Im hoping, cause I have a lot of ground to make up.
Originally Posted by Newman
LOL...I feel like its gonna be MORE THAN "Just Another Manic Monday"....:thumbup:...so "Start Me UP".