Giant Trading Losses – What not to do? Chapter 3 – The widow maker arbitrage on Natural Gas / Amaranth Advisors

Background: Natural gas is a highly volatile & inflammable fuel. Natural gas futures are even more volatile to trade. It is usual for NG to move 10% in either direction in matter of minutes. You don’t get “widow maker” as a moniker for nothing. However, the higher volatility always provides greater opportunities for making profits. Making it alluring for adventurous traders. Let’s examine the Amaranth disaster. Source: https://www.wsj.com/articles/SB115871715733268470 Fundamentally, this trade too was a spread bet like Aas trade we saw in chapter 2. Specifically, called as “calendar spread” i.e. instead of betting against 2 different instruments, one can use…...