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A bold trade is unfolding in the energy markets, dubbed the "Widowmaker." Traders play the spread between gasoline and heating oil, as seasonal demand shifts with the warming weather in the Northern Hermisphere. There seems to be larger bets on the market this year, as hot money is entering the trade. The trade is known as the "widowmaker" because of its volatile and unpredictable nature. However, traders are making larger speculative bets in gasoline after an unusually cold winter and an expected sharp increase in gasoline demand this summer.

From Reuters: "The hot money is on gasoline this season and a lot of hedge funds have bet on it," said an oil products trader at a bank and a regular widowmaker trader. "Seasonality is back because of run cuts and because it's been such a cold winter. There is a belief that demand for gasoline will be very good this year because it is not as connected to the recession as distillates," the trader said.

The risk, of course, is that gas prices stay below heating oil, like in 2008 when record high oil prices slashed demand for motor fuel. The Chart belw shows a shap spike in the spread in the summer of 2005, 2006, but a huge fall in 2008.

Gasoline vs. Heating Oil Spread


Source: Hard Asset Investor

Ways To Play the WidowMaker?

Long UGA (United States Gasoline Fund, LP )

Short UHN (United States Heating Oil Fund, LP )

The Gas/Heating Oil spread has rallied sharply since the depths of the financial crisis. Over the past year, the long UGA/short UHN strategy would have gained about 20%. Not suprisingly, these funds track the movements of the Oil funds closely, so essentially the Long/Short trade is a hedged Oil position.

Source: ETFDesk.com

UHN started trading on 4/9/2008, since then USO has fallen 54.91%, but the Gas/Heating Oil ETF Long/Short is up 19%. Notice that during the depths of Oil price declines in late '08, Gas prices fell further. As Oil (USO) has recovered, Gas (UGA) has outpaced both Oil and Heating Oil (UHN).

Source: ETFDesk.com

Disclosure: No positions

Source: The Big Energy Trade: The WidowMaker