What is going on with Sirius?!?!

[Danimal]

Should I sell and break even, or ride this til howard stern. Sell short and buy when it goes back to normal? Weird stuff. 10% increase yesterday and today

Danimal

[Dan Mezick]

On 1/31/05 SIRI closes at 6.70; this is an important price.

It represents the place where many miserable buyers from Jan, Feb, Mar, Apr, May (now all potential sellers) may be quite happy to get out.

I notice price today is 6.70 and it gets there on a substantial increase in volume.

If all the miserable people soon vacate by selling here, all that will be left are mostly "up" people, mostly recent buyers, mostly holding the stock strongly, mostly with the likely intention of selling at higher prices.

Perhaps much higher.

Buying here today with a risk-controlling stop loss set somewhat lower than yesterday's close allows me to back my opinion about this with money, while accepting relatively low risk, maybe 4% max, as I find out what is happening now.

Thank you for bringing SIRI to my attention today.

[NoTalent]

Dan can you explain what you mean by:

"Buying here today with a risk-controlling stop loss set somewhat lower than yesterday's close allows me to back my opinion about this with money, while accepting relatively low risk, maybe 4% max, as I find out what is happening now."

For the investment-challenged readers?

Thanks

[Dan Mezick]

Every stock position can optionally protected from catastrophic loss, by employing the Stop Loss order.

It is a conditional order based on price. For example say you hold 100 shares of SIRI and it closes today at 6.70. You can place a Stop Loss order to sell SIRI at 6.40, then if and when a trade takes place at that price or lower, the Stop Loss order becomes a Market Order and your 100 SIRI are sold at the market price, as of the time the price event takes place. You take a small loss to avoid a potential catastrophic loss.

The StopLoss order is used primarily to define risk. When you take a position and immediately enter a Stop Loss order, you define your risk. The risk is the difference between the purchase price and the Stop Loss price, minus any slippage. Slippage is defined as the difference between your specified Stop Loss price and the actual fill price for that Stop Loss order.

Experienced traders seldom trade without using a protective Stop Loss order. The Stop Loss is primarily a tool used to define risk.

Skilled traders often look for spots where the upside is great and the downside is minimal. You identify the potential upside with your method. You define the downside with a protective stop.


Example:
On 6/26/2005 you see SIRI is around 6.70. You figure the chance of the price of SIRI increasing 10% or more in the next few weeks is 75%. You have 25K in a brokerage account and you want to risk no more than 1% of that on a position in SIRI. If you are correct you have identified a 10:1 reward to risk ratio situation.

Steps

1. Figure dollar risk max: Calculate the 1% risk you are willing to take. 25K * .01 = $250 risk in dollars.

2. Define your stop price: The price where you admit the trade did not work as planned . Look at the daily range in price over the past N days, or yesterday’s low, or use some other criteria you incorporate in your method. Set the stop too tight, and you guarantee you will be stopped out due to normal price fluctuations. Set the stop too loose and you define and assume more risk. Let’s say you determine $6.40 is a price that proves the trade did not work as planned. That’s 30 cents of risk per share if you bought at $6.70.

3. Determine how many to buy: Divide .30 into $250, this gives you how many to buy: .30/$250 = 833.33. Round to 800 shares.

4. Summary: To risk 1% of your 25K account on this trade, you want to buy 800 shares @ 6.70. As soon as you fill that order, you place a Stop Loss order to sell those same 800 @ 6.40 or lower. Your risk is now defined as .30 * 800 = $240 plus any slippage plus commissions. This is roughly 1% of your 25K account. You think that price can move 10% higher soon; if correct you have set up a 1:10 risk/reward situation.

Note also that if you determine the correct place to set the stop is not $6.40 but lower, say $6.20, then in that case you have to reduce the trade size to keep the dollar risk at $250, which is roughly 1% of your account. The reader might want to try calculating the # shares to buy in this case, as an exercise.

Note that .30 per share risk/$6.70 a share is 4.47% risk on the entire trade; however the total trade value is $5360 (800 shares X $6.70 per share). By keeping the trade size small and using a stop to define risk, the overall portfolio risk is 1% for this trade, even though you are taking a 4.47% risk on this (single) position.

Risking 1% on any one trade is considered quite aggressive and 2 or 3% is considered super-aggressive. This is not a misprint.

Breakout Theory

When you trade this way you look for spots where the stop can be set very tight so the risk is low. One such spot is a new high, or a high that is higher than a multi-month high.

If you look at the chart of SIRI you will see that the price achieved on 1/31/2005 is currently a 5-month high. That price is $6.70, a price that was touched yesterday. Price has been below the level achieved on 1/31/2005 for about 5 months.

Some traders think that when price gets near a historical high, many others who bought near that price in the recent past will sell. This is where they can ‘get even’ on a 2,3,4,or 5 month losing trade.

When all those miserable people go and sell to get even, they set the stage for a breakout to new highs. After most of these sellers complete what they are doing, the new crop of buyers may then drive price up rapidly because most of the sellers are now out of the way.

In theory this can result in a breakout, a rapid move in price upwards that blows through the old high (in this case $6.70) and then moves sharply to a new, higher level of price equilibrium.

So in this case I was saying I can buy at SIRI at 6.70 in anticipation of a breakout to new highs, and I can define my risk to be very low in this spot if I decide to back my opinion with money.

I hope this explanation helps. Stops are essential to risk control. Choosing to enter in spots where stops can be set fairly tight is usually advantageous. You may enter several times and be wrong, taking a very small loss. If and when price breaks out, it pays for all the little losses "plus".

Many traders that utilize a breakout method may enter and exit fearlessly on tight stops several times (aka experiencing “whipsaws”) before entering at the place where price ultimately takes off.

See also:
http://tradingalchemy.com/ReadAboutBreakout.htm

[WhiskyRiver]

So a Stop Loss is, for the most part, relatively short term traders? What are your thoughts on Sirius for those of us who have been sitting for a long time? I bought in for 1000 shares at 2.35. This was one of the first stocks I bought (obviously an amateur at the whole thing), so I would obviously be quite happy right now taking the profit. However, since I don't need the money and haven't exactly been doing much studying lately to find anything new to invest in, in my mind it would seem stupid to sell now since, based on trends and positive news, the chance of a huge dive is slim compared to the upside. Thoughts?

[Dan Mezick]

A stop loss order is the primary tool employed to define risk on a per-position basis. If you accept the idea that anything can happen at any time when holding any security, you accept the risk that a security can go to zero in a very short time.

If you accept that risk, you work on proper sizing of the position relative to total account equity, and you always use a protective stop loss order.

Position size-- "how much" or "what percentage" of total tradeable account equity to place on one position-- is THE primary tool for controlling risk. Correct sizing is key.

[ QUOTE ]
...based on trends...

[/ QUOTE ]

SIRI is challenging a well-established resistance level of 6.70 set late in January 2005.

If it can clear 6.70 on a closing basis on higher-than-average volume, anything can happen.

If you want to lock down a profit, you may consider selling some percentage of your total position at a price that looks good.

Many early holders of MSFT did exactly this. Others, perhaps more astute and certainly more patient, stayed on the long-term trend and rode it all the way to 2000-2001 when the uptrend ended.

These are the people that got 40X on their money over approximately 10 years.

.

Long-term MSFT chart with 200 day moving average

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[Dan Mezick]

C'mon now, let's root for this breakout of SIRI way past the Jan/Feb high of 6.70+, on double average volume for the past 2 days, c'mon now ... something big is brewing here

SIRI, short view (last 5 days)

SIRI, intermediate view, busting out past January highs on volume

Can it bust out again, past the $9 level ??

[Autocratic]

I am confident that the next year or so will bring Sirius up a good amount. As far as business is concerned, it has no where to go but up.

[player24]

S&P Credit Report:

Credit Rating: CCC/Stable/--

Rationale
The very low speculative-grade rating on New York, N.Y.-based Sirius Satellite Radio Inc. reflects the company's substantial debt load, large projected EBITDA and cash flow deficits for this start-up business for at least the next couple of years, and increased rivalry for exclusive programming and subscribers that may continue to raise both operating costs and the number of subscribers needed to reach break-even cash flow. These risk factors are not meaningfully offset by the near-term benefit of Sirius' sizable liquid assets and operational progress.

Sirius' subscriber growth has improved as it has filled some important product line gaps, secured more meaningful installation programs with its exclusive automotive partners, and expanded its retail distribution. Even so, its only direct competitor, XM Satellite Radio Holdings Inc. (CCC+/Stable/--), has more than twice as many total subscribers and faster unit growth because of its stronger automotive partner support and product innovation. Sirius' growing roster of exclusive content has improved its product appeal somewhat, but these deals may not generate enough growth to justify the high cost.

Sirius' subscriber base increased 338% in 2004 and 237% in the first quarter of 2005, putting it on track to reach its revised year-end goal of 2.7 million users (up from its original estimate of 2.5 million). Higher subscriber levels are producing strong revenue growth, but the fast growth is also pushing EBITDA losses higher as subscriber acquisition costs (SAC) are rising significantly even as they decline per new user.

The company's EBITDA loss (before equity grants) for the 12 months ended March 31, 2005, was considerable, at $505 million, compared with $456 million in 2004. EBITDA losses after equity grants to third parties and employees were even more substantial, at $653 million for the 12 months ended March 31, 2005, and $583 million in 2004. The company's discretionary cash flow deficit for the 12 months ended March 31, 2005, was also substantial, at $412 million, even with the benefit of large noncash equity expenses and subscriber prepayments.

Sirius' ability to reach break-even cash flow will require substantially more subscribers, continued significant reductions in SAC per new user, and cost discipline. Sirius' SAC per new user should continue to gradually decline with volume efficiencies and the pending introduction of next-generation chipsets. Debt levels are substantial, at $656 million at March 31, 2005, but interest costs are mitigated somewhat by the predominance of low-coupon convertible notes (90% of its debt at March 31, 2005).

Liquidity
Sirius' liquidity relies on its sizable liquid asset balances and access to the capital markets, because the company is not expected to generate positive discretionary cash flow for at least two more years. Substantial liquid resources are critical, as access to the public debt and equity markets is unpredictable. Sirius' money-draining growth phase may extend longer than currently expected, especially if it makes additional large investments in programming or distribution. As of March 31, 2005, Sirius had $629 million in cash and equivalents. A proposed $250 million second-quarter note offering remains on hold but could be revived if market conditions improve. Near-term debt maturities are moderate compared with the company's current liquid resources, with $29 million in bonds maturing in 2007 and $67 million in convertible notes (which are currently in the money) maturing in 2008.


Outlook
The stable outlook on Sirius reflects its operational progress and the near-term flexibility provided by its liquid assets. A disruption of its operational progress or the failure to maintain meaningful liquid resources could lead to a revision in the outlook to negative. Conversely, achieving a positive outlook will require continued momentum in building its subscriber base, success in significantly lowering its SAC per new user, and cost discipline.

[Dan Mezick]

I notice Sirius and XM are being retailed to consumers at my local CIRCUIT CITY.