OPTIONS BEAT-Deal rumors, research note fueled XM calls Friday

By Doris Frankel

CHICAGO, Feb 20 (Reuters) - Bullish options activity in XM Satellite Radio Holdings Inc. XMSR.O on Friday ahead of news of a pending merger with Sirius Satellite Radio was unusual but not necessarily a sign of insider trading, options market participants said.

Rumors of a deal, which Sirius Satellite Radio (SIRI.O: Quote, Profile, Research, Stock Buzz) and XM Satellite announced on Monday, had circulated among trading desks for weeks and option traders could have been buying calls to position for further share gains heading into a long holiday weekend, they said.

Some of Friday's upside call activity may have been tied to comments by Bear Stearns that a possible deal could increase the value of XM Satellite's shares, which have shed about 25 percent in value from recent highs.

"We think both XM Satellite and Sirius believe a proposed merger could likely pass the regulatory hurdles, which we think would push them to attempt a merger," the Friday note said.

"It looks like there was more than usual activity in the XM March 15 calls, but this is hard to attribute to the weekend announcement or a memo from Bear Stearns," said Michael Schwartz, chief options strategist at Oppenheimer & Co Inc. in New York.

The U.S. Securities and Exchange Commission declined to comment on the unusual options trading activity.

Prevention of insider trading is also in the domain of the six U.S. options exchanges that set up ORSA, an options surveillance regulatory entity. "We do not comment on specific investigations," an ORSA spokesman said.

"We did see unusual upside call buying in XM Satellite, particularly the March 15 and 17.5 calls on Friday," said Pete Najarian, co-founder of Web information site optionmonster.com in Chicago.