Whoever started the rumor that sent the stock of Pennzoil Co. shooting through the roof on Jan. 7 had a keen sense of timing.

The stock of the Houston-based oil company had been a prime target for rumors and speculation since Pennzoil won a staggering $10.53 billion judgment -- plus interest -- against Texaco Inc. in November, in a breach-of-contract suit over Texaco's acquisition of Getty Oil Co.

After a Texas judge affirmed the jury's verdict in December, the two companies began exploring a possible settlement. As is the common practice, both sides signed a confidentiality agreement, which barred them from making any public comment about the negotiations.

Texaco's board of directors secretly approved a settlement proposal to buy Pennzoil on Monday, Jan. 6, after a marathon meeting, too late for a public announcement. Pennzoil was advised the offer would be delivered Tuesday.

Reporters and arbitrageurs (professional investors), who knew of the meeting, barraged sources at, or close to, the companies. "There are enough people involved on both sides" so that word leaked that an offer would be made, said one source. The details of the offer remained secret, apparently, but speculation began to fly.

According to the Dow Jones New Service, a specific rumor took hold early Jan. 7. Texaco would offer 3 1/2 of its shares for each Pennzoil share, a deal worth more than $100 a share for Pennzoil stockholders. Pennzoil's stock soared from its $63.25 opening price. "There was no conflict in the rumors. There was one rumor," says Pennzoil Chairman J. Hugh Liedtke.

Pennzoil officials, alarmed that activity might signal a move to take over the company, twice asked the New York Stock Exchange to shut down trading. But the exchange, following its rules, said Pennzoil would first have to report a major development affecting the company.

Pennzoil couldn't make such a report because it didn't know what Texaco's settlement offer would be until it arrived at Pennzoil's headquarters. That happened at 2:30 p.m. in Houston -- or 3:30 p.m. in New York.

By the time Pennzoil's directors had reviewed the offer, rejected it, and issued a statement, trading had ended on the New York Stock Exchange. Although Liedtke later said Texaco's offer was not near $100 a share, that wasn't known on Jan. 7 or 8. Rumors pushed Pennzoil's stock price as high as $91 Wednesday, Jan. 8, before profit-taking dropped it to $74.50 at the close of trading that day.

The biggest winners were not the investors in Pennzoil stock but rather those who had bought options on Pennzoil stock on the Chicago Board of Trade. An option gives an investor the opportunity to buy stock at a specific price at a future date. Because the investment is a gamble, the option price is a fraction of the price of the stock itself.

On Monday, the option to buy 100 shares of Pennzoil for $75, or $7,500 in total, sold for $37.50. On Tuesday, with rumors of a $100-a-share offer from Texaco circulating, the option price shot up to $1,025 for 100 shares. A shrewd speculator could have bought the option on Monday and sold on Tuesday making a profit of nearly 3,000 percent. The trading is now under investigation by the Securities and Exchange Commission.