Overnight risk
Family III · Risk
Not to be confused with forex risk, correlation risk, gap risk.
Overnight risk is the exposure to price changes that can occur between the close of one trading session and the open of the next, when positions cannot be adjusted and markets may react to news. It applies to any instrument held through a session break, including stocks, futures, and foreign exchange. The risk arises because trading is discontinuous, so the next available price may differ substantially from the last traded price.
What drives overnight risk
Overnight risk is driven by the gap between the closing price and the next session's opening price. During the closure, scheduled events such as earnings releases, economic data, or central bank announcements can occur, as can unscheduled events such as political developments or natural disasters. Because no continuous market exists to absorb these events, the first trade of the next session may clear at a significantly different level.
The magnitude of overnight risk varies by asset class, market liquidity, and the presence of overlapping trading sessions. Instruments with near-continuous trading, such as major currency pairs, tend to have smaller overnight gaps than those with fixed daily sessions, such as individual equities.
Worked example
A trader holds 100 shares of a company that closes at 50.00. After the close, the company reports earnings that disappoint the market. The next morning, the stock opens at 46.50.
The loss occurs before the trader can place a new order, because the market was closed when the news was released.
Managing overnight risk
Participants may reduce overnight risk by closing positions before the session ends, holding smaller positions, or using instruments that trade around the clock. Some markets offer after-hours sessions, but these typically have thinner liquidity and wider spreads. Stop orders do not guarantee a specific exit price overnight, because they become market orders when triggered and may fill at the next available price, which can be far from the stop level.
Often confused with
- forex risk
- Forex risk is the broader exposure to currency price movements from any source, while overnight risk is specifically the exposure during a session break; the visible sign is that forex risk can change during active trading hours, whereas overnight risk is realised only when the market reopens.
- correlation risk
- Correlation risk is the danger that assets expected to move independently instead move together, while overnight risk is the danger of price change during a market closure; the visible sign is that correlation risk is measured across positions, whereas overnight risk is measured across time.
- gap risk
- Gap risk is the possibility of a price jump between two consecutive trades, while overnight risk is the exposure to such jumps specifically when they occur across a session break; the visible sign is that gap risk can occur intraday, whereas overnight risk requires a market closure.