Watch Out for a Possible Gamma Squeeze in Midstream Operator Enbridge (ENB)

At first glance, Enbridge (ENB) seems a very reasonable idea amid the confusing market backdrop. As a midstream energy operator, the company specializes in storage and transportation services. However, the hydrocarbon focus might seem to imply a race against relevance for ENB stock. After all, the political and social winds favor clean and renewable energy integration.

At the same time, electric vehicles are expensive relative to their combustion-powered counterparts. Even with a sector-wide price war, the accessibility hasn’t come down to the point where middle-income consumers can readily afford EVs. As of the latest data, the average age of passenger vehicles on U.S. roadways hit a record 12.5 years.

If median-income households were buying EVs at large scale, you’d expect this metric to decline, not rise. So long as people depend on hydrocarbons, Enbridge appears to command a relevance that might not fade anytime soon.

Even better, Enbridge has been making plans to adapt to new realities. One example, per Barchart content partner The Motley Fool, is that the midstream player has agreed to several bolt-on deals to foster its energy transition businesses:

It’s paying $1.2 billion to acquire seven operating landfill-to-renewable natural gas assets in the U.S. In addition, Enbridge is nearly doubling its interest in two German offshore windfarms in a 625 million Euro ($670.5 million) deal.

Combine its right here, right now relevance with its robust dividend yield and you have a solid long-term argument. And now, a possible gamma squeeze could translate to near-term upside as well.

ENB Stock Could Get Mighty Interesting

So, what exactly is a gamma squeeze? Generally speaking, it’s a type of speculative activity driven by panic. Its cousin, the short squeeze, panics out directly bearish traders. As the underlying asset rises in price, the bears must close out their position – through buying the asset they are short – to avoid the prospect of unlimited losses.

On the other hand, a gamma squeeze develops due to a change in the rate of volatility (delta) of an options contract. Typically, gamma squeezes involve short-dated (near-expiry) sold call options, though they can impact near-expiry put options as well. To better appreciate the potential upside, one must understand the functioning of sold (written) options, in this case calls.

When you buy a call option, you have the right but not the obligation to exercise the contract. Assuming you’re buying a “face-value” call and not using it as part of a complex multi-tiered options strategy, the hope is that the underlying security rises above the contract’s strike price. At that point, you’re guaranteed to be able to buy low and sell high.

However, the narrative is basically flipped when you sell calls. Here, you have the obligation but not the right to fulfill the contract (i.e. sell the underlying security at the strike price). Should you be selling the calls naked – referring to selling calls but without actually owning the underlying stock, not that you’re trading options without clothes on – you have a major problem.

It’s just like promising to sell a car online and receiving payment for it (i.e. the options premium received when underwriting the risk of sold options transactions) but not actually having the car. Should the price of the stock rise for whatever reason, those already short the security must buy more of it to cover their position to avoid potential catastrophic financial damage.

I mention all this because when you look at Barchart’s unusual options volume screener, ENB stock options represent one of the most aberrant trades. Not only that, call volume easily exceeds put volume to the tune of 41,198 contracts to 768.

Institutional Traders May be Feeling Hot Under the Collar

What’s even more intriguing, Fintel’s options flow data – which exclusively filters for big block transactions likely made by institutions – reveals an avalanche of sold calls on Monday. Specifically, we’re talking about the Nov 17 ’23 30.00 and 32.50 Call options. Given that the expiration is only days away and with ENB stock rising in an otherwise flat session on Wall Street, concerns may be heating up.

Since the risky bearish transactions were engaged at prices that were in the money (ITM) for call buyers – because obviously the Monday close of $33.81 is higher than either $30 or $32.50 – it may not take much for a panic (or at least robust mitigatory action) to materialize. If ENB stock continues to march higher, upside momentum could build, possibly sending shares rocketing northbound.

But then, why would anyone take the bearish side of this trade? Since ENB stock classifies as a “sell” based on Barchart’s Technical Opinion rating, it’s not necessarily the most shocking development that pessimists attempted to scalp a quick profit – by collecting the premium – on sold calls.

It’s just that you don’t want to catch the market on a “bad” day when you conduct this trade.

More Options News from Barchart

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Chevron’s 4.2% Dividend Yield and Low 10x P/E Multiple Make It Cheap

On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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