CBS Corporation Singled Out for a Short Strangle After Earnings

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Referenced Stocks:CBOE;CBS

CBS Corporation (CBS - 26.62) gapped higher on Wednesday, as Wall Street cheered the media company's stronger-than-forecast first-quarter results. The stock scored a slew of price-target boosts in the wake of the report, with analysts at Barclays, Benchmark, UBS and Wedbush all raising their forecasts for CBS shares. However, one options player today is betting on CBS to stagnate during the intermediate term.

Earlier today, two blocks totaling 10,000 contracts traded at the bid price of $0.80 on CBS' September 30 call, with implied volatility dipping 1.4 percentage points as a result. Simultaneously, two matching blocks of 10,000 contracts changed hands at the bid price of $0.80 on the stock's September 23 put -- again, prompting a 1.4 percentage-point drop in implied volatility. Today's volume is easily outstripping open interest at both strikes, suggesting that all of these options were freshly sold to open.

In other words, this appears to be the initiation of a short strangle on CBS. By selling an equivalent number of out-of-the-money puts and calls, the trader is looking to capitalize on an expected period of range-bound price action for the shares. The maximum potential profit is limited to the initial net credit of $1.60, which the trader may keep in full if CBS settles anywhere between $23 and $30 upon September expiration.

While the maximum reward is limited, the trader is facing potentially high risk if his technical forecast doesn't pan out. If CBS should fall below $21.40 (put strike minus net credit), the trader will begin to incur losses on the put option. Meanwhile, on the upside, losses will begin to mount following a move above $31.60 (call strike plus net credit).

Checking out the stock's technical performance, CBS has marched considerably higher from its March 2009 all-time nadir of $3.06. However, in the intervening months, there have definitely been some opportunities to profit from range-bound price action. From December 2009 through September 2010, for example, the stock was pinned in a five-point range between $12 and $17.

Plus, in the wake of its earnings-related breakout, CBS now sports an inflated Relative Strength Index (RSI) of 73 -- indicating the shares are short-term overbought, and potentially due to consolidate some gains. This would be a welcome development for the short strangle speculator.

Scanning the rest of the stock's sentiment backdrop, traders in general seem to be bracing for a pullback. CBS' Schaeffer's put/call open interest ratio (SOIR) stands at 1.25, revealing that puts outnumber calls among near-term options. This ratio registers in the 79th percentile of its annual range, just 21 percentage points from a pessimistic peak.

During the past 10 days on the International Securities Exchange (ISE), Chicago Board Options Exchange ( CBOE ), and NASDAQ OMX PHLX (PHLX), CBS has earned a put/call volume ratio of 0.42. This ratio ranks above 65% of other such readings taken during the past year, implying that traders have purchased puts over calls at a modestly accelerated pace in recent weeks.

Likewise, short interest is on the upswing. The number of shares sold short swelled by nearly 102% during the past month, and advanced by 6.4% during the most recent reporting period. These bearish bets now account for 3.6% of the security's float.

It's worth noting that CBS trekked higher on the charts during the last two weeks of April, despite the corresponding uptick in short interest. The equity's ability to keep rising in the face of this selling pressure points to deep-seated technical strength.

In fact, as CBS continues to climb the charts, an unwinding of skepticism could help propel the stock even higher. As a result, today's short strangle speculator may be at greater risk of swallowing losses on his sold call, rather than the put.

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