The Big Energy Trade: The WidowMaker

A bold trade is unfolding in the energy markets, dubbed the “Widowmaker.”  Traders play the spread between gasoline and heating oil, as seasonal demand shifts with the warming weather in the Northern Hermisphere.  There seems to be larger bets on the market this year, as hot money is entering the trade.  The trade is known as the “widowmaker” because of its volatile and unpredictable nature.  However, traders are making larger speculative bets in gasoline after an unusuasly cold winter and an expected sharp increase in gasoline demand this summer.

From Reuters:

“The hot money is on gasoline this season and a lot of hedge funds have bet on it,” said an oil products trader at a bank and a regular widowmaker trader. “Seasonality is back because of run cuts and because it’s been such a cold winter. There is a belief that demand for gasoline will be very good this year because it is not as connected to the recession as distillates,” the trader said

The risk of course, is that gas prices stay below heating oil, like in 2008 when record high oil prices slashed demand for motor fuel. The Chart belw shows a shap spike in the spread in the summer of 2005, 2006, but a huge fall in 2008.

Gasoline vs. Heating Oil Spread

Source: Hard Asset Investor

 

WaysToPlay the WidowMaker?

Long UGA  United States Gasoline Fund, LP

Short UHN  United States Heating Oil Fund, LP

track this trade over time:  http://www.etfdesk.com/headline.aspx?hId=2379

The Gas/Heating Oil spread has rallied sharply since the depths of the financial crisis.

Over the past year, the long UGA/short UHN  strategy would have gained about 20%.  Not suprisingly, these funds track the movements of the Oil funds closely, so essentially the Long/Short trade is a hedged Oil position.

Source: ETFDesk.com

UHN started trading on 4/9/2008, since then USO has fallen 54.91%, but the Gas/Heating Oil ETF Long/Short is up 19%. Notice that during the depths of Oil price declines in late ’08, Gas prices fell further.  As Oil (USO)  has recovered, Gas (UGA) has outpaced both Oil and Heating Oil (UHN).

Source: ETFDesk.com

 

 

Advertisements

1 Response to “The Big Energy Trade: The WidowMaker”



  1. 1 About Widowmaker Trade | Worldwide News Trackback on March 17, 2010 at 9:34 am

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s




Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Join 39 other followers

ETFDesk.com

ETFDesk Spotlight

March 2010
M T W T F S S
« Feb   May »
1234567
891011121314
15161718192021
22232425262728
293031  

%d bloggers like this: