Gamma Energy: As XLE Call Buying Explodes, Energy Sector Braces For Huge Melt Up

Remember the “gamma squeeze” in various tech names amid the unprecedented Robinhood/SoftBank call buying frenzy from the summer/late 2020? Well, while SoftBank’s market manipulation unit may have been “incapacitated” for the time being after suffering major losses, the record call buying has continued into 2021 as retail daytraders have put their $600 (and soon $2000) “stimmy” checks to “good” use. In fact, just last week we saw that 4th and 5th highest call volume days in history!

Only this time there is a difference: unlike the FAAMG/tech euphoria that marked much of 2020, this time the rabid levered daytraders have turned their attention elsewhere. Surprisingly, it is to the one sector so many had left for dead in 2020 – energy.

As Susquehanna’s Chris Murphy points out, “option investors have never been so bullish on energy stocks.” As shown in the chart below, open interest in call options for the most popular energy ETF, the XLE (or Energy Select Sector SPDR Fund) has exploded higher in just the last few days sending its ratio relative to puts to a record.

This record energy call buying may explain why there has been a sharp spike higher in such energy names as Exxon in recent weeks; it’s also why the surge across energy names may be just starting.

Curiously, this appears to be a phenomenon isolated within energy: other ETFs in cyclical sectors such as banks and small caps, haven’t seen a similar phenomenon in option activity.

As Bloomberg notes, while President-elect Joe Biden has pledged to focus on green energy, which in turn has made such ESG ETFs as the TAN explode in late 2020, the potential for “trillions” more in  stimulus under a Democrats blue sweep, as well as Saudi Arabia’s shocking $1mm bbd crude-supply cut have sent WTI above $52 a barrel. The XLE ETF has already rallied 44% since Nov. 3.

But if options traders have their way, this could be just the start of the next massive gamma squeeze.