Last week was successful for the markets and for the deep-in-the-money call strategy. Domestic and international markets regained some of their losses from the week before, and three of my deep-in-the-money calls came in, paying off as expected.
The most recent payoff came Friday, when the
August 30s (APCHF) that I suggested Feb. 28 at $10.50 came in. During last Friday's trading session, the calls traded up to $11.50, $1 above purchase, where I always put my good-till-canceled limit order.
Mergers are one of the major driving forces of any bull market. Although it remains unclear which way the broader markets are heading, investors love finding value in mergers, as they hope companies can gain a competitive advantage and better position themselves for success.
On Feb. 19,
XM Satellite Radio
Sirius Satellite Radio
announced a merger that many on Wall Street had been waiting to see for years. This deal, if approved, would enable these former foes to focus on maximizing profit, rather than breaking each others' backs.
Since the inception of their satellite radio service battle, XM and Sirius have focused on maximizing their subscriber base by differentiating their products from each other. The companies went to great lengths and expense to achieve this goal, so while revenue has grown at both companies, profit has not. The lack of profits is a direct result of the intense competition.
With this merger, the removal of this pressure to attract subscribers will allow these two companies to focus on what really matters: differentiating their product from the various other forms of media. Together, the former foes can focus on bringing new listeners into satellite radio and making satellite radio as strong a product as possible.
Many question whether the merger will actually receive FCC and
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,
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
, 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
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.
In the major leagues, there was a Rocket sighting in Yankeedom the other day. Roger Clemens was spotted at a Yankees Grapefruit League game chatting with Brian Cashman. Although the conversation was supposedly light-hearted and casual, I would absolutely place a deep-in-the-money call that Cashman will be offering employment to the Rocket in the not-too-distant future. The only other potential landing sites for Clemens appear to be the Red Sox or the Astros. Regardless of his final destination, the payload will be exorbitant for a 100-game season. Obviously, if The Rocket propels you to the post-season, the extravagant spending becomes justifiable.
The NFL experienced more player movement over the past several days, with both free-agent signings and trades. The Cleveland Browns signed Jamal Lewis, who was cut by the Ravens. That signing allowed them to then trade Reuben Droughns to the Giants for wide receiver Tim Carter. The Falcons signed Joe Horn, who played a significant role in the marvelous ride of the New Orleans Saints this past year. Dominic Rhodes left the Super Bowl champion Indianapolis Colts to sign with the Oakland Raiders.
In addition to the running backs, wide receivers and quarterbacks who are expected to garner the big money, a few linemen carved out contracts befitting their huge stature. Leonard Davis, Derrick Dockery and Eric Steinbach signed contracts for about $49 million each with $17 million to $18.75 million guaranteed with the Cowboys, Bills and Browns respectively. The one player who came up beyond huge was Nate Clements, who signed with the 49ers for $80 million, with $22.6 million guaranteed.
Now, let's shift our focus from free agents securing enormous sums of money to 18- to 22-year-olds who play for the love of the game and the name on the front of their uniform. Granted, perhaps 3% to 5% of the participants in March Madness will ultimately earn lucrative contracts in the NBA. However, presently, the focus is on winning an NCAA Championship, which will allow them to brag to their grandchildren.
The NCAA Tournament Selection Committee claimed it was going to place an emphasis on the conference tournaments this year, and, true to its word, the four No. 1 seeds -- Ohio State, Kansas, North Carolina and Florida -- all won their respective conference tournaments. Drexel, Air Force, Syracuse and Florida State had their bubbles burst on Selection Sunday.
The power conferences, led by the ACC with seven representatives and the Big East, Big 10 and Pac 10 with six each, were rewarded for their overall strength. Lute Olsen, coach of Arizona, secured his 23rd consecutive NCAA berth, which ties the record of Dean Smith, the legendary North Carolina coach. Invariably, there will be upsets, disappointing performances, heroic performances and controversial calls. For some, they will experience wonderful memories that will last a lifetime. For others, they will suffer indescribable heartache that will forever have them asking, "What if?" Nonetheless, March Madness will dominate the sports landscape for the next three weeks.
The Players Club appreciates the unabashed enthusiasm of college hoopsters and anxiously awaits the memories they will create for us as March Madness unfolds. As their careers continue into the pro ranks, we will work diligently to provide guaranteed recurring cash flow, to enable them to create and preserve terrific memories moving forward.
Always remember: Life is a journey, enjoy the ride!
At the time of publication, Dykstra was long XMSR, AMGN.
Nicknamed "Nails" for his tough style of play during his Major League Baseball career, Lenny Dykstra was an integral member of the powerful Mets of the mid-1980s, including the world champion 1986 squad, and the Phillies in the early 1990s.
Today, Dykstra manages his own stock portfolio and serves as president of several of his privately held companies, including car washes; a partnership with Castrol in "Team Dykstra" Quick Lube Centers; a state-of-the-art ConocoPhillips fueling facility; a real estate development company; and a new venture to develop several "I Sold It on eBay" stores throughout high-demographic areas of Southern California.