When Amaranth gas trader Brian Hunter bet the March/April spread in 2007 and 2008 would widen, John Arnold of Centaurus Energy LP was on the other side of the trade betting that March would collapse faster than April, causing the spread to narrow.
March/April is nicknamed the “widowmaker.”
What you see here is the value of the spread – the difference between the prices of the two contracts in 2007 – in this case March NYMEX Nat Gas and April NYMEX Nat Gas. At its peak, the March traded at $2.50 premium to the April in August 2007. Each penny move ($0.01) is worth $100. This spread is very liquid and you can trade it many years out.
You didn’t have to be the brightest star in the sky to see the trend here…
To profit from a narrowing spread as in this case, a trader would have entered the following orders concurrently:
Sell NGH7
Buy NGJ7
By the time the trade went off the board, the spread had gone from trading $2.50 premium to the March to zero. In dollar terms, that’s $25,000 per spread.
The 2008 spread narrowed significantly also. Had you been short the spread, you’d have made anything up to approximately $14,000 per spread. By expiration, this spread had inverted: it traded as high as $1.40 premium to the March to $0.10 premium to the April.
Please note: I reserve the right to delete comments that are offensive or off-topic.