Widow Maker
What Is a Widow Maker?
In the world of financial markets, a widow maker is an investment that outcomes in large, possibly wrecking losses. It can likewise allude to a trade that outcomes in a loss for basically every individual who attempts it. In conversational utilization, a widow maker alludes to anything with the possibility to rapidly kill somebody. The phrase has historically been utilized in ranger service and medication.
Figuring out a Widow Maker
Traders apply the term widow maker to financial investments that cause catastrophic losses or are adequately risky to do as such. The utilization of the term in ranger service alludes to loose appendages stopped overhead that are at risk of suddenly falling and killing somebody. In medication, the term alludes to a blocked corridor liable to cause a patient's death by a coronary failure.
Exorbitant risk frequently assumes a critical part in widow maker trades. When in doubt, investments liable to offer high returns likewise hold the potential for greater losses. Numerous investors come to conclusions about their investments in view of the amount of risk they will take on to accomplish a certain level of return. This is known as the risk/reward ratio.
Some widow maker trades, however, seem OK according to a rational point of view, meaning they don't give off an impression of being just risky. However, eventually, the market frustrates consensus expectations and even challenges historical examples.
True Examples
Japanese Government Bonds
Shorting Japanese government bonds (JGBs) is maybe the most notable widow maker trade of all. Traders have shorted JGBs throughout recent a very long time as Japanese government debt spiraled ever higher. Normally, this trade would seem OK. However, the Japanese central bank has repeatedly pushed interest rates to exceptional lows — even below nothing — and this drove JGB prices to record highs, making "widows" of numerous traders throughout the long term.
Amaranth and Commodities
One more renowned illustration of a widow maker trade happened in natural gas futures, which professional traders have long considered widow makers in view of their price volatility. In 2006, the hedge fund Amaranth Advisors made a huge leveraged trade on natural gas futures, attempting to repeat its prosperity on a comparable speculative trade made a year sooner.
Amaranth was a $9.5 billion hedge fund when it was forced to close due to its enormous losses in the natural gas market.
The energy desk at Amaranth looked for higher-than-normal rewards by taking on a risky trade in a market inclined to eccentric and swift price changes. Adding leverage increased that risk further. Rather than partaking in a replay of their previous lucrative trade, Amaranth lost $6 billion as everything went horribly wrong for the natural gas market. This huge loss forced the hedge fund to liquidate its assets.
Natural Gas Today
The futures spread in the energy market known as the widow maker talked about above in the Amaranth model is the spread between March natural gas futures contracts and April natural gas futures contracts. Walk denotes the low point of natural gas contracts on the grounds that the contract is all the more actively traded in winter when natural gas is required for heating.
Walk is typically the last month when utility companies are moving natural gas out of storage. April is the principal month when utility companies begin moving natural gas once more into storage. At the point when the spread is wide, it shows there is a high demand/need for natural gas. At the point when the spread is low, it shows there is little demand/need for natural gas.
In December 2021, gas futures dropped to their lowest point in 90 days and the widow maker trade hit a 20-month low, which indicated that natural gas stockpiles were adequate. On the off chance that investors were on some unacceptable side of the trade, misinterpreting the spread due to an error in supply and demand, their investments would have seen losses.
Highlights
- In financial markets, the term widow maker alludes to a trade that outcomes in a large, even catastrophic loss.
- A common widow maker trade in the financial markets includes natural gas futures.
- The term widow maker has additionally been utilized in ranger service and medication and signifies the possibility of sudden death.
- The most renowned widow maker trade is shorting Japanese government bonds (JGBs) given that the Japanese government keeps on pushing interest rates lower.
- Widow maker can likewise allude to a trade where the market repeatedly bewilders market consensus and even opposes historical examples, bringing about losses for each and every individual who attempts the trade.
FAQ
What Is a Widow Maker Stock?
A widow maker stock is a stock that has high risk and high returns. The stock would have the capability of making a large loss an investor. Ordinarily, a widow maker wouldn't allude to a specific stock yet rather a type of trade that could bring about a loss.
Why Is Natural Gas Called the Widow Maker?
Natural gas is called a widow maker since investors try to exploit the spread between March natural gas futures contracts (while trading hits a low due to the furthest limit of winter) and April natural gas futures contracts (when utilities resupply natural gas storage). Contingent upon the demand/need for natural gas all through winter, assuming that investors are on some unacceptable side of the trade, misinterpreting the spread, their investments can be cleared out. The volatility of the spread makes it be a widow maker trade.
What Is the Japanese Interest Rate?
The Japanese interest rate is as of now - 0.10%.
