There are several Futures spreads that move a great deal. New crop /old crop spreads in the grains are one such example. There is though only one Futures spread in the energy markets that is known as the “Widow Maker”. What exactly is the Widow Maker and what makes it so volatile? Pete Mulmat, our Futures expert, explains this Natural Gas spread and provides some background and his trade idea.
Natural Gas is the second most active energy contract (Crude Oil is #1) and is based upon delivery at the Henry Hub in Louisiana. A chart displayed the contract specs. Natural Gas hit lows in March but has recently seen prices double the lows. Because it is used more in the winter because of heating needs there is a period of withdrawal and a period of injection (into storage). The March marks the end of withdrawal and the April contract marks the beginning of injection. The Pros pay sharp attention to this spread which has been dubbed The Widow Maker. The range of the spread has been about ten cents ($1000 per contract) over the last month or so but has a history of some huge moves.
Pete showed a chart of the December through April contracts. The curve is relatively flat, but sloping up. The contracts are in Contango, which is what one would expect and what is normal. Pete next showed a chart of a snapshot of the recent and nearby months. A table laid out Pete’s Futures Calendar spread trade idea, long the March /NG and short the April /NG. The table included the Buying Power Reduction (BPR). Pete reminded us that the order can be done as a spread and the benefits of doing so, including tight Bid-Ask Spreads.
For more on Natural Gas see:
Closing The Gap - Futures Edition from September 25, 2015: "Natural Gas Strategies"
Closing The Gap - Futures Edition from January 15, 2016: "Hot or Not: Natural Gas"
Closing The Gap - Futures Edition from July 1, 2016: "Natural Gas Calendars & Contango"
Closing The Gap - Futures Edition from September 2, 2016: "Natural Gas Calendars"
Watch this segment of Closing the Gap - Futures Edition with Tom Sosnoff, Tony Battista and Pete Mulmat for the key takeaways and a better understanding of both the Natural Gas Futures and the Widow Maker Spread.
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