Bearish Options Activity Against Sirius XM (SIRI) Could Be Short Lived

Without leaving you in suspense, traders should be cautious about Sirius XM (SIRI). A once-prominent player in the broader media space, Sirius – which specializes in satellite radio – has long struggled due to the rise of competition. In addition, the company was simply slow to address the threat of streaming services. Thus, it’s no surprise that in the year-to-date period, SIRI stock fell more than 32%.

Nevertheless, beaten-down enterprises are also liable on occasion to bounce higher. Consider the example of a kickboard that’s been forcibly submerged underwater. Let it go and the swimming apparatus’ natural buoyancy sends it shooting back up, sometimes violently depending on the circumstances. That may be the case with SIRI stock.

No, the underlying enterprise hasn’t yet adequately addressed the wider competitive concerns. However, with the normalization of society, it’s quite possible that more people may be interested in attaining a subscription service, perhaps to make the morning commute a little more tolerable. As well, Sirius – like any other content platform – can differentiate itself through its partnerships and overall library of offerings.

It's still a long shot, to be fair. However, with SIRI stock gained 35% over the past five sessions, it’s not unreasonable to think that Sirius can ink some long-term momentum. It just needs to get over an incoming speedbump.

Unusual Options Activity Poses a Near-Term Challenge for SIRI Stock

Following the closing bell last Friday, SIRI stock ranked among the most aberrant trades within Barchart’s unusual stock options volume screener. This data interface clues retail investors in on what the smart money may be doing with its funds; specifically, it does this by filtering for transactions that feature higher total volume than what is normally seen.

In the case of SIRI stock, this total metric hit 474,316 contracts against an open interest reading of nearly 1.5 million. Relative to the trailing-month average, Friday’s volume stood at 314.52% up. Drilling into the details, call volume hit 297,777 contracts versus put volume of 176,539. This pairing yielded a put/call volume ratio of 0.59.

Now, let’s stop right there. On paper, more calls than puts suggest that the overall sentiment is bullish. However, with options, for every buyer, there must be a seller. To that end, investors should also monitor Barchart’s options flow screener. This tool filters exclusively for big block transactions likely placed by institutional players.

Here, we find that net trade sentiment for SIRI stock options came out to $2.2 million below parity. That is, options (both calls and puts) with bearish sentiment featured total premiums of $3.07 million in the red. Options with bullish sentiment came out to only $862,000. Stated differently, many of the top traders are likely selling the aforementioned call options.

By selling calls, traders are collecting the income associated with market participants on the other side of the fence buying said derivatives. The idea here is that SIRI stock will not rise above the underlying strike price. If it does, the call seller (or writer) would be obligated to fulfill the terms of the contract; that is, to sell 100 shares of SIRI per each call option at the strike price.

Technically speaking, there appears to be a “shooting star” pattern that formed in the candlestick chart on the Friday session. That’s a candlestick that features a relatively small body with a long shadow pointing toward the upward direction.

Technical analysis – despite its name – isn’t very technical nor is it a science. However, if you follow trading wisdom, a shooting star may portend an incoming reversal. So, I wouldn’t be shocked to see SIRI stock tumble this week.

Short Interest to Possibly Save Sirius XM

So, is that the end for SIRI stock? Not quite yet in my opinion. One factor that could save Sirius XM is ironically its high short interest.

Currently, the short interest as a percentage of float for SIRI stock stands at 24.44%. That’s quite elevated. In addition, the short interest ratio (or the time it takes for bearish traders to unwind their positions) lands at 2.07 days to cover. That’s not a whole lot of time yet it’s long enough to make bears uncomfortable.

To quickly summarize, a short trade is a bet against a particular security: should the stock fall, the position rises in value. To directly short a company’s equity, one must first borrow the underlying security, sell it, hope it falls in value and then buy it back at a discount, with the difference in the selling price and the buy-back price representing the profit.

However, if the underlying equity rises in value, the short trader would be pocketing losses, not profits. In a scenario where a targeted security keeps rising in value, there’s obviously a greater incentive to cut losses early. Otherwise, the theoretical concept of unlimited liability comes into play.

With short interest still so high, a so-called short squeeze could easily send SIRI stock rocketing back up. Let the bears have their fun this week but bullish speculators should carefully watch this intriguing opportunity.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.