Volume Talks Monday: A Sirius Reversal

As the market traded higher across the board Monday on lighter volume, there were many stocks which traded higher/lower on above average volume. Today's breakout report is for Monday March 22, 2010. If this is your first time reading one of my breakout reports you'll want to read the section below, however if you are familiar with my daily breakout report you should skip ahead to the list of stocks.

To reiterate previous blog posts like this, the first thing I do is scan the list for familiar names, such as stocks I am quite familiar with or ones which have appeared on similar scans multiple times in the past week or two (most of these names are unfamiliar so it saves a lot of time). This indicates there may be some real momentum behind the stock, and that it could trade higher/lower in following sessions as well. Then (if and when any of the stocks I find are familiar to me), I make sure the stock has options available to trade, and then take a look at the chart(s) to see if I can structure a potential option trade. The list in this post includes 23 stocks which traded higher on heavier volume, and 12 stocks which traded lower on heavier volume Monday March 22, 2010. Many times I find an option strategy I plan on opening if I am convinced some money can be made.

The tables below show the company, ticker, per share % increase, and volume increase (% increased compared to 50 day average). The first table is a list of potential bullish stocks, the second table is a list of potential bearish stocks. For your convenience I have ranked both tables in order from greatest to least volume % change.

Out of the bullish list above, one stock I was watching all day Monday was Sirius XM Radio, Inc. (SIRI). Sirius opened Monday slightly lower than Friday's close and traded down to 79 cents before reversing the day to close higher by 3.98%. Most of us know about Sirius XM, but as always before we get into the chart details, I will give a company profile from Google (GOOG) Finance below.

Looking at the chart below, we can see some rather bullish price action. To me, this price action signals short term strength; I was selling June put options as it ticked positive, and buying May call options near close when it was apparent of this bullish chart pattern. I wrote about Sirius XM in early March as I saw a similar reversal, and Sirius traded higher by roughly 10% following that post before retesting the lows of that reversal day on March 2. If I was strictly an equities trader I would get long Sirius XM here with trailing stop loss of about 5-6%. However I am more of an options trader, so I have outlined a strategy below which will put me into shares of Sirius for roughly a 7.7% discount and give me unlimited gains to the upside if it happens to move higher by May options expiration.

Sirius XM Radio Option Strategy: This is a very simple trade to make and only require two different option legs. First I would look to sell in the money June 1 strike put options for a credit of $25 per contract. Note that if Sirius closes on June 19, 2010 below $1 per share I will receive 100 shares for each contract I am short. I would then look to purchase May 1 strike Call options for $5 per contract. This would put $20 (less commissions) into my account for each long combo position I got filled making my overall cost basis on each share of Sirius 80 cents (if it gets put to me). It is very important to note that I do not mind owning shares of Sirius at 80 cents come June options expiration. By purchasing the May call options, I will also capture unlimited gains beyond 1.05 per share by May options expiration. There is a rumor that March auto sales may be stronger than anticipated which would be a positive for Sirius, therefore there may be some increased buying in shares of Sirius going into that release on April 1, and will likely cause an increase in volatility which will cause the options to be a bit overpriced. It is important to note that I am looking to get long additional shares of Sirius for a slightly lower cost without losing upside potential, which is why I am using this option strategy. It is extremely important to note that this strategy is much less liquid than purchasing shares of SIRI and may not suit a very active trader.

Profit & Loss: The maximum loss from this strategy will be $80 per long combo position and will be if Shares of Sirius XM trade to zero ($0.00) by June options expiration. The gain from this strategy is unlimited until May options expiration with profit increasing with each penny shares of Sirius trade over $1.05, the position can be closed at anytime or shares can be exercised at expiration for $1. After May options expiration the gain is capped to $20 per long combo position until June options expiration, with the maximum gain being if Sirius closes above $1. The break even per share price is 80 cents at June options expiration. I rarely wait until expiration to close or allow my position to get exercised.

This is a bullish strategy and should not be considered if you think the stock will sell off in the near future. However if you feel the stock could move higher in the near future, this strategy could yield a nice gain. To get a better understanding of stock options and different option strategies please check out my Simplified Stock Option Trading E-Books.

These are just examples and are not recommendations to buy or sell any security; if you're more bullish/bearish, you’ll want to adjust the strike price and expiration accordingly.

The reason option volumes have surged in the last five years is because they are a great way to hedge your portfolio as well as create income off of your shares (see chart here). Keep in mind when using this strategy it is essential that broker commissions are low enough to profit from the position.

Disclosure: Long SIRI, SIRI May 1 Call Options, Short SIRI June 1 Put Options