As a writer for a website dedicated to satellite radio I am often asked for my opinion on trading Sirius XM. First and foremost, I am not a financial adviser, and would fully recommend that anyone considering an investment consult a person certified in that field. Secondly, I do not trade this equity. I have a position in SIRI, but have sat on that position for quite some time. I purposefully do not trade SIRI, because I do not want my integrity called into question, or accusations that I write a certain way because I am on one side of a trade or another. There have been dozens of times where I would have loved to make a move (either buying or selling), but held that desire in check.

That being said, I think there is an opportunity in SIRI in the upcoming month that is worth discussing, and I will share my thoughts on it as though I were going to trade in this position. This site is updated with new articles frequently, so as a reader you need to check back. Often there are glimmerings of my sentiment within those articles, and if you combine the facts and opinions in several articles you can see a clearer picture. I strongly suggest readers go through the linked articles outlined in this piece. It may take time, but I think you will find it worth your while.

Last week I wrote an article about the upcoming Russell Re-Balance. In that piece I outlined the potential opportunities that the Russel Re-Balance. If Sirius XM Radio closes above $1.00 on May 28th, the will be added to the Russell indexes on June 25th. This means that funds that play the Russell, and any fund that “mirrors” it will have to take a position in Sirius XM Radio on June 25, 2010. This is key information for a trader to know.

I also penned an analyst round-up, showing that the analyst community has become more bullish on Sirius XM Radio. Analyst price targets are usually a year out, but they also like to have a little room to show those that follow their analysis that they are on the right path. I look for most of the analyst targets to be tested and/or eclipsed in much less than a year, especially considering the Russell re-balance. Of note in many of these reports is that Sirius XM left guidance alone, but left room to raise it at a later date. If auto sales remain at their current trend of about 1 million units per month, it will be an indication to savvy investors that the auto channel will once again help Sirius XM report positive subscribers, and essentially the street will begin to know that at least the subscriber numbers will be updated.

This week, I noted that short interest was up another 22%, with the days to cover that position increasing by more than 100%. While this is hardly a recipe for a massive short squeeze as yet, it could play into the hands of smart traders taking advantage of known issues such as the Russell re-balance. While the short data is 12 days old, there have only been 7 trading days since the data’s stop point, and volume has been pretty light. Combine that with anemic volume like we saw today, and the days-to-cover gets even more interesting.

Now that I have laid the foundation, let me share with you my ideas about trading this equity over the coming weeks. It is my opinion that there is little benefit in the day trading of Sirius XM at this point. The real play rests with the Russell re-balance, May 28th, and June 25th. The strategy I will outline requires that you pay attention over the coming weeks to make adjustments as necessary. This strategy assumes that Sirius XM will trade above $1.00 to qualify for the Russel re-balance on May 28th, and uses stop loss orders to minimize risk.

With today’s close at $1.07 on weak volume, I would look to be a buyer on any dip below this level with a stop loss order in place at $0.94. This limits a loss to 12% or less. If Sirius XM goes down and the stop gets taken out, you can sit on the sideline for a moment and see what will happen (whether it bounces off of $0.86 again or not) before considering the next move. If it does bounce off of $0.86 and moves up you will still have time to get back in at a level below $1.07.

If Sirius XM begins to climb, you can move your stop loss order up to protect yourself further. If Sirius takes out $1.14 but does not run to $1.25, you may consider accumulating more, but be cautious as the resistance levels are weak, meaning as they are passed they will become weak support. Watch volume. Upward or downward moves on low volume show that those levels are not strong, and the equity could go either way. Keep your stop in a place that minimizes losses, but avoids being taken out on a head fake ( I know that the MM’s can see the stops, so use of them means that you must be willing to be taken out without huge emotion).

May 28th is only 12 trading days away, so you don’t have to rush to take your position, but you do need to think on your feet. If it looks questionable as to whether May 28th will bring a close over $1.00 use more caution. If May 28th passes, and SIRI is over $1.00, you are now in the drivers seat having already accumulated some shares. This does not mean you have to stop. We are now in territory with the known factor that all Russel index funds will have to take a position in Sirius XM. Play the dips and adjust your stops to appropriate and comfortable levels.

The Russell re-balance happens after market close on June 25th, which is a Friday. Bear this in mind. You want the benefit of the Russel re-balance, and need to be ready to act in anticipation of it on Friday, or wait until Monday. One key is taking emotion out of the trade, and having your strategy in place so you don’t trick yourself into doing something you shouldn’t have. The world is full of investors who have left something on the table. Do not be afraid to take your profits. If you decide to stay in the game, simply adjust your stops to appropriate levels. However, remember this is a trade and the goal is to make money.

With this trade, the goal is using advanced knowledge to your advantage and limiting risk by employing reasonable stops that avoid head fakes if possible. This is best accomplished by “giving up” at least one support level. You can tighten them up as the trade plays out.

Again, you need to consider many things when making an investment decision, and my opinion (as someone who is not a financial adviser) is but one among many. If I was trading this equity, this would be my strategy. Minimized risk and potential upside gains that are more substantial than that risk. Happy trading.

Tune into SiriusBuzz Radio This Thursday at 9:00 PM and share your trading ideas.

Position – Long Sirius XM Radio