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The Widowmaker Trade: Got the Guts for This Oil Play?

Friday, 12 Mar 2010 | 3:28 PM ET

As seasonal demand shifts with the warming weather in the Northern Hemisphere, energy traders have been playing the spread between gasoline and heating oil, known as the “widowmaker.”

While investors can potentially reap in big money, the trade is also known to be risky and volatile. Should you get in? Addison Armstrong, director of market research at Tradition Energy, and John Kilduff, co-chief investment officer of Round Earth Capital, discussed their insights.

The Widowmaker Trade
The widowmaker trade can make you rich or take the life out of your portfolio. John Kilduff, of Round Earth Capital, and Addison Armstrong, of Tradition Energy, discuss this make or break trade.

“It gives investors a false sense of security,” Kilduff told CNBC.

“As good as this trade can be, I’ve seen it go the other way.”

Kilduff said while the "widowmaker" can make a good trade for some players, he remains leery.

“There’s a lot of momentum it can really run, but there are some things weighing on it—whether or not the consumer can withstand $3 a gallon,” said Kilduff. “The consumers are much more damaged than in 2007, when they were able to pay $4 a gallon before we saw any resistance.”

  • RBOB Gasoline Futures Now

Kilduff also said he expects crude oil to soar to $100 a barrel before July.

Counterpoint: Room to Run

On the other hand, Armstrong said there’s further room to run in the widowmaker trade.

“The spread is out to about 16 cents, which is not nearly as wide as it got two years ago when it got to 50 cents,” he said.

“I’m not sure you’re going to see 50 cents on it like you did before, but if you get 26 cents from 15, you’ve got a nice profit on it.”

In terms of crude oil prices, Armstrong said if prices hold at above $80, it could rise further and test the $85 to $90 levels. Otherwise, he said he sees prices falling back down to $70.

  • Light, Sweet Crude Futures Now
  • Heating Oil, Natural Gas and Uranium

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More Market Intelligence:

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Top Oil Firms:

ExxonMobil

Chevron

ConocoPhilips

BP

Hess

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Disclosures:

No immediate information was available for Armstrong or Kilduff.

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Disclaimer

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