Options Squeeze Sends CBS Stock Soaring

CBS Inc. stock, which takeover speculation has made one of the most volatile on Wall Street, has become the victim of yet another form of Wall Street maneuvering--the options squeeze.

The soaring shares of CBS gained $4.75 on Friday to close at $123.25 in heavy trading on the New York Stock Exchange. The stock had risen $5 on Thursday. And, although the run-up was accompanied by plenty of rumors attributing takeover interest to, variously, Minneapolis entrepreneur Irwin L. Jacobs and New York real estate men Zachary and Larry Fisher, stock market sources say the true story lay elsewhere.

These sources say the run-up and rumors were largely connected to an attempt to squeeze sellers of “naked” CBS call options on the Chicago Board Options Exchange. A call option represents the right, but not the obligation, to buy the underlying stock at a given price by a given date. The seller of a “naked” call--that is, one sold by someone who does not own the underlying stock--is betting that the stock’s price will fall or remain far below the price at which it makes sense to exercise the option. The seller collects the price of the options from the buyers, assuming that he or she will never have to deliver the shares.

That CBS stock was destined to fall appeared to be a good bet a week ago, after the company announced that Loews Corp., already the owner of more than 11% of CBS, agreed to take a 25% position and that Loews Chairman Laurence Tisch would join the CBS board this month.

Loews’ commanding stake would dampen the ardor of any potential raiders, it was reasoned, and the stock would fall from the $120 range to a more “normal” price of about $100. But, while Chicago options traders were dealing what they thought were such apparently easy-money options as November 125 calls--the right to buy CBS for $125 by the end of this month--sources say arbitrageurs in New York were not only buying up the options but the stock as well.

That means that, when the takeover rumors began anew this week and Chicago traders rushed to cover their options by buying shares, there were precious few shares available. At one point Friday, CBS shares rose to a 52-week high of $126.25, abruptly placing the November 125 calls “in the money,” meaning it would be profitable for someone to exercise the option.

“That created a panic situation,” one source said.

There was no question that the CBS options market was, if anything, more overheated than the stock market. The November 125 calls were the most active option on the CBOE on Friday, rising $2.325 a share (or $232.50 for each contract covering 100 shares) to $4. As recently as Monday, when CBS stock was selling for about $109, those calls were selling for 25 cents a share.

Friday’s volume was 7,850 contracts, representing the rights to buy 785,000 CBS shares and accounting for more than 25% of the total options volume on the Chicago Board.

Many market observers say they traced the rumors to New York arbitrageurs.

“A lot of us are being misled solely for the reason that the arbs are playing a hot game,” said Edward Atorino, a broadcast-stock analyst at Smith Barney, Harris Upham & Co.

Although the squeeze play spread widely through the arbitrage community, several sources pointed to one arbitrageur whose strategy reportedly played a major role in setting off the action in CBS: John A. Mulhearn, who recently left the firm of Spear, Leeds & Kellogg to form his own firm, Jamie Securities.

‘No Corporate Developments’

“We don’t comment on what we’re buying or selling,” said Ed McCarthy, a Mulhearn associate.

CBS officials professed stupefaction at the stock’s activity. “We really know of no corporate developments that would account for this,” said Anne Luzzatto, a company spokesman.

The frenetic market activity could put a serious crimp in CBS’ hopes that Loews’ 25% stake will discourage takeover attempts. Loews must buy its shares in the open market, where they are now more than 10% more expensive than they were when the company’s deal with CBS was announced.

“Knowing Larry Tisch’s style, the last thing he wants to do is make money for arbitrageurs,” said one analyst. “When the stock gets to $130, he might just sell.”