The March versus April natural gas spread, which prices the risk that winter ends with storage empty. Famous for enormous, fast losses.
March is the last winter contract and April the first injection-season contract. The spread is therefore a pure bet on end-of-winter storage: if the withdrawal season ends with tanks full, March collapses toward April; if a late cold snap drains storage, March can run away with no ceiling.
The asymmetry is what earns the nickname. April is anchored by the cost of producing gas over the summer, but March in a shortage has no upper bound, so a short spread has capped gains and uncapped losses. Amaranth Advisors lost roughly $6 billion in 2006 largely in natural gas calendar spreads of this kind.
Example: March $3.20, April $3.05, spread +$0.15. Natural gas is 10,000 MMBtu per contract, so $0.15 is $1,500 per spread. A cold February that pushes the spread to $1.50 costs a short $13,500 per spread on a position whose margin was a few hundred dollars.
Original diagrams for the ideas on this page. Illustrative, not real market data.
The bid-ask spread. Buy orders sit below, sell orders above, and the gap between the best bid (50.01) and best ask (50.04) is the spread you pay to cross. Bar length shows the size resting at each price.Margin and leverage. A $5,000 deposit can control a $100,000 position, which is 20:1 leverage. Because the loss is measured on the full $100,000, a 2.5% move against you halves the deposit and brings a margin call, and a 5% move uses all of it.
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