Dykstra: Take a Ride on XM Satellite Radio

Many question whether the merger will actually receive FCC and SEC approval in light of its likely effect on competition. However, I believe the same factors that make this merger profitable for the two companies will ultimately help push the federal regulators in its favor as well.

Approval of this merger will hinge on how regulators define the relevant consumer market. In this day and age, with so many different options for consumers in terms of media, it will be hard not to construe the consumer market as the media market in general, rather than just the satellite radio field.

Since satellite radio was first launched, Apple's(AAPL Quote) iPod and iTunes have emerged as serious players in the media field, and standard radio continues to enjoy a steady listener base. Because satellite radio must compete with standard radio and other digitally based media, this merger would enhance the consumer market rather than hinder it. It would allow XM and Sirius to focus on bringing the best product to their consumers, while at the same time maximizing profits.

When the two companies are combined, owners of XM shares will get 4.6 shares of Sirius stock for each XM share they own. On Friday, Sirius closed at $3.42 with XM at $13.62. If the conversion were to occur at that price, owners of XM stock would get their Sirius shares at $2.96, for a 13% discount. (According to Bloomberg, the current spread on the deal is 15%.) As speculation swings toward regulatory approval, XM shares should get a nice bounce.

That leads us to today's in-the-money call, XM Satellite. Buy 10 of the October $7.50 (QSYJU) in-the-money calls, using a limit order at $6.40. Basically, we are buying 1,000 shares of XM for $6,400 opposed to $13,620, on the basis of XM's closing price last Friday. If we get filled, we will be paying just 28 cents in premium, and we can ride the position all the way out until the third Friday in October, which is seven months away.

Also, I would buy 20 more Amgen(AMGN Quote) July 55s at $7.30 or better. The common stock, at a recent $59.28, is at the next buy level. The $59 to $59.50 range is an important level, representing long-term support.

Now let's visit the sports world.