SIRIUS XM Radio Inc. (NASDAQ: SIRI) is one of those stocks that you either love it or you love to hate.  The company’s earnings showed $157.8 million in adjusted operating income and CEO Mel Karmazin and friends backed $550 million in pro forma adjusted income for all of 2010, as well as revenue of $2.7 billion, net subscriber adds of 500,000, and it sees being net free cash flow.  Revenues were $670 million, below expectations of $671.3 million (Thomson Reuters) and average revenue per subscriber was down about 6%.

All things being said, this was actually a good quarter and it is not easy to bash the results.   It ended with 18.9 million subscribers, saw the self-pay churn drop to 2% and Sometimes good is good enough and sometimes good isn’t good enough.  SIRIUS XM needed a breather after earnings.

The performance ahead of earnings was solid as it was just yesterday that the new 52-week high of $1.25 was hit.  The problem is not just that this stock is over 1,000% from its panic-selling lows of the bear market.  It was just April 13, 2010 that the stock was under the $1.00 mark.  And today marks the fifteenth consecutive day the stock has traded over $1.00.  SIRIUS now probably won’t have to undertake that reverse stock split.

SIRIUS XM, as has been known for a year now, is actually far larger than the market cap would suggest.  Liberty’s stake in preferred shares suddenly makes the fully diluted outstanding shares some 6 billion rather than about 3.8 billion counted under most market caps on public websites.

We noted a Hail Mary options trade over at OptionsZone.com in more detail, and that is the MAY-2010 $1.50 CALLS.  The cost today?  A whopping $0.01 per contract.  The reason you want in on that contract is that on a de-leveraged basis this gives you literally only a penny per share of downside, where buying the stock outright could easily give you downside of $0.05, $0.10, $0.15 or more on any negative news or on any market panic.  But if an analyst or ratings agency upgrades the stock, if there is a sudden flurry of re-interest, or anything else, then that $0.01 could become worth exponentially more.  Simply put, it is another outlier bet.  And yes, unlike traditional investing or even trading IT IS A BET and nothing more.

On a market-neutral basis, it seems likely that SIRIUS XM will see its shares flounder here for a few days now that the earnings event is behind the stock and now that its 52-week high has been established at a higher level.  That is why the options trade is so attractive.  It is likely that the stock would have to have some great outside news or that something great would need to develop for that penny option to have any value. In fact, on just a quick glance it seems that SIRIUS would need to rapidly hit $1.30 for the options to even come alive.  But that also gives an equal risk-reward on the downside versus upside.

Shares were indicated up over 1% in the pre-market, but the stock is now down right at 5% at $1.16 X $1.17.  We have also seen 115 million shares trade with more than two hours until the market closes.  The current 52-week range is $0.30 to $1.25.

JON C. OGG

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