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) 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.

Upcoming XM earnings, February options expiration and the persistent rumors of a possible merger could have been contributing factors to the surge in bullish options activity, he said.

"Since November, there has been a consistent buying trend of the upside calls in XM Satellite going into a weekend because of rumors that this merger may occur," Najarian said.

Some call activity could be related to monthly options expiration as traders rolled over expiring February options into March and April. Najarian added. February options went off the board after the close on Friday.

In all, more than 34,000 calls traded in XM on Friday versus 7,281 puts, according to a model by options education firm Optionetics in Redwood City, California.

Prior to the announcement, it was the busiest day for XM Satellite call options this year and far outpaced its average volume in puts and calls of 13,006 contracts.

The March calls with $15 strike prices were active as 7,717 contracts changed hands on Friday as XM Satellite shares traded in a range between $13.25 and $14.10. Activity was seen in the March 17.5, April 15, July 17.5 and July 20 calls, Ruffy said.

Equity call options grant the right to buy the underlying security at a predetermined price within a specified time period. A call option is out-of-the-money if the strike price is greater than the market price of the security and buying these calls gives an investor a chance to profit handsomely if the share price rises.

"The fact that most of the volume was in the March, April, and July out-of-the-money calls hints at speculative activity in anticipation of a move higher in XM Satellite," said Optionetics analyst Frederic Ruffy.