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.