What Is a Widow Maker?

A widow maker invests in financial markets that yield significant, maybe catastrophic, losses. It may also describe a deal that rarely turns a profit for the person trying it. A widowmaker is slang for something that can kill someone rapidly. The words have been used in medicine and forestry historically.

Knowledge of a Widow Maker

Traders refer to financial investments that result in catastrophic losses or are sufficiently hazardous to do so as widow makers. In forestry, the word is used to describe loose branches that are positioned above and have the potential to fall abruptly and cause fatalities. In the medical field, the phrase describes an arterial blockage that may result in a heart attack and death for the patient.

High risk is often a crucial factor in widow-maker deals. Generally speaking, investments with a high return potential also have a higher risk of loss. Many investors base their investment decisions on the degree of risk they are willing to accept to get a specific rate of return. The risk/reward ratio is the term for this.

However, certain widow-maker transactions seem reasonable and not all that hazardous. Ultimately, however, the market bewilders general opinion and even goes against past trends.

Real-Life Illustrations

Japanese Debt Securities

Shorting Japanese government bonds (JGBs) is the most famous among the widow-maker trades. Over the last 20 years, traders have shorted JGBs as Japanese government debt has increased dramatically. This exchange would make sense in most cases. However, since the Japanese central bank has consistently lowered interest rates to previously unheard-of levels—even below zero—JGB values have reached all-time highs, making several traders “widows.”

Amaranth and Materials

Natural gas futures, whose price volatility has long led experienced traders to see them as widow-makers, provided another well-known example of a widow-maker transaction. The hedge fund Amaranth Advisors launched a huge leveraged bet on natural gas futures in 2006 to build on its success from a similar speculative move conducted the previous year.

When Amaranth was forced to liquidate because of its enormous losses in the natural gas market, it was a $9.5 billion hedge fund.

The Amaranth Energy desk took a chance on a hazardous transaction in a market where prices may move quickly and without warning in an attempt to achieve returns that were greater than usual. Leverage increased that danger even further. As the price of natural gas crashed, Amaranth lost $6 billion instead of reaping the rewards of their earlier profitable deal. Due to this enormous loss, the hedge fund was compelled to sell its holdings.

Natural Gas Right Now

The difference between the contracts for March and April natural gas futures is the futures spread in the energy market known as the widow maker, which was covered in the Amaranth example above. Because natural gas contracts are more frequently traded in the winter, when natural gas is required for heating, March is considered the low period for natural gas contracts.

March is the final month that utility companies typically remove natural gas from storage. Utility providers restocked natural gas in storage for the first time in April. A large spread suggests that natural gas is highly demanded or necessary. A low spread means there is little need or demand for natural gas.

Gas futures fell to a three-month low in December 2021, and the widow maker trade fell to a 20-month low, suggesting that natural gas supplies were plentiful. Investment losses would have occurred if investors had been on the wrong side of the deal, misjudging the spread due to incorrect supply and demand calculations.

A Widow Maker Stock: What Is It?

A stock with significant risk and great rewards is a widow-maker stock. An investor can suffer a substantial loss on the stock. A widowmaker usually talks about a deal that might end up losing money rather than a particular stock.

The Widow Maker: Why Is Natural Gas Called That?

Natural gas is referred to as a widowmaker because investors try to profit from the difference between natural gas futures contracts in March, when the trade reaches a low point because of the end of winter, and in April, when utilities replenish natural gas storage. Investors risk losing all they have invested if they are mistaken about the transaction and misjudge the spread, which will depend on the demand and need for natural gas over the winter. It’s a widow-maker trade because of the spread’s volatility.

Conclusion

• The phrase “widow maker” describes a deal in the financial markets that causes a significant, potentially disastrous loss.
• A deal known as a widowmaker may also be defined as one in which every trader who attempts it loses money as the market consistently defies past trends and even market consensus.
• The phrase “widow maker,” which implies the likelihood of an unexpected death, is also used in forestry and medicine.
• Natural gas futures are a widespread widow-maker trade in the financial markets.
• Since the Japanese government keeps driving down interest rates, shorting Japanese government bonds (JGBs) is the most well-known widow-making trade.