Gap risk
Family III · Risk
Not to be confused with forex risk, correlation risk, overnight risk.
Gap risk is the possibility that an asset's price will jump between the close of one trading session and the open of the next, skipping intermediate levels and preventing orders from being filled at expected prices. It is most common when markets are closed and news, earnings, or macroeconomic events occur. The resulting price discontinuity can turn a planned stop-loss into an executed fill at a significantly worse level.
How gaps create losses
Stop-loss orders are typically triggered by a trade at or through the stop price. If the market opens beyond that price, the stop becomes a market order and is filled at the next available price, which may be far from the stop level. The difference between the intended stop price and the actual fill is the gap loss. This risk is not limited to equities: futures, forex, and commodities can gap after weekends or holidays.
Worked example
Managing gap risk
Traders may reduce gap risk by using options to define risk, trading smaller position sizes, avoiding holding through scheduled events, or using instruments that trade nearly continuously. No method eliminates gap risk entirely because it arises from the absence of trading, not from order type.
Often confused with
- forex risk
- Forex risk refers to currency exposure from exchange-rate movements, while gap risk is the danger of price jumps between sessions; the visible sign is that forex risk exists even when markets are open continuously, whereas gap risk requires a market closure.
- correlation risk
- Correlation risk is the danger that supposedly independent positions move together, while gap risk is a single-asset price discontinuity; the visible sign is that correlation risk involves multiple positions, whereas gap risk affects one instrument at a time.
- overnight risk
- Overnight risk is the general exposure to any adverse event while a market is closed, while gap risk is the specific price jump that can result; the visible sign is that overnight risk can be hedged with offsetting positions, but gap risk can still cause a loss if the hedge also gaps.