What's the real risk of a major gap while the market is closed?

nazzdack · Mar 28, 2011

Quote from blackjack007:
----April 2000 rate cut was intra-day....

1) Ah yes....April 17th, 2000. :eek:
2) There was another intra-day move on January 3rd, 2001 also. The FED really wanted to punish the "shorts".

MTE · Mar 28, 2011

Quote from Eliot Hosewater:

I downloaded SPX data from Yahoo to check for major gaps from the previous close to the next open. The 50 biggest ones, both up and down, occurred in the 1950s and there were only a few more than 2%. In those days a 5% move could be about a point or two.

I'm sure anything is possible, but what are the real chances of a major percentage gap these days?

Edit: Even after the earthquake in Japan two weeks ago the S&P only opened 3 points lower on Monday than it closed the Friday of the quake (IIRC the quake happened just about closing time).

I haven't really read the other answers so I apologize if someone has already pointed this out.

SPX is an index and, therefore, it is unlikely to have large gaps. For example, futures may be trading 2-3% lower and the index could still open unchanged because of the way it is calculated (i.e. not all of the component stocks start trading at the same time). The SPX options, on the other hand, would reflect that "gap" in the futures at the open even though the index may be unchanged. You really need to look at a tradable instrument to be able to assess the gap risk.

FrankSlaughtery · Mar 28, 2011

Quote from blackjack007:

i remember quite a few of them from sep-oct 2008.

i also remember MLK day 2008 when ES went limit-down and the fed had to do the emergency rate cut. asian markets had crashed and US markets were about to crash.

the odds of a large gap-down happening on any given day are very low. but the odds it will happen at some point in your trading career is 100%.

+1. Given that there will be a large gap down how will you protect yourself? Stops would be absolutely useless. Diversification for the most part is useless as correlations would go to 1 due to everyone puking up positions (except for treasuries). You could trade ES options on globex and not have to wait for the open but as another poster said wide spreads might be an issue. In this case you could exercise them and sell the futures if mm's walk away. Don't fear the black swan. PTJ tripled his money after the '87 crash.

BlackBison · Mar 28, 2011

There is always a risk of an outsize gap, just because we have been in a huge multi- decade bull market in equities people have forgotten how crazy stocks used to be in the past.

I know this is in FX which is a different market, but as an example gbp.usd once gapped down 1,800 ticks over a weekend back sometime around 1980 (I was not there, but I have read about it). It is obviously possible for this sort of extreme gap to happen in any market, given the right situation.

Anything is possible in the markets, but should you always plan for an event like this? That is up to the individual.

spindr0 · Mar 28, 2011

Quote from Eliot Hosewater:

Any idea how SPX (or SPY) options work in that case? I recall having a position about 5 years ago and realizing the market was going to open lower. Sorry, it's all a bit fuzzy and I don't recall the underlying or the position, but I put an order in to close the night before and it got filled before the stock market opened and at a price before it tanked.

You're only going to get a fill if the market trades at the pprice you seek. It can be dumb money or just getting a decent price before the order imbalance occur and sends things down fast.

Edit: I just checked 9/17/2001 and the low of the day was "only" 5% lower than the alleged open, which yahoo reports as the same as the 9/10 close. I don't recall where it really started trading that day.

Don't assume that because the opening price is only X % below the previous close that you will get to trade there. Most people tend to watch the drop as it gets worse. Even if you are disciplined and you have determined that you will close at the open, in a fast market, your fill may end up even lower. Try watching a fast open (up or down) on a big day and find out how untradeable it can be (limit, not market order).

spindr0 · Mar 28, 2011

Quote from FrankSlaughtery:

+1. Given that there will be a large gap down how will you protect yourself? Stops would be absolutely useless. Diversification for the most part is useless as correlations would go to 1 due to everyone puking up positions (except for treasuries). You could trade ES options on globex and not have to wait for the open but as another poster said wide spreads might be an issue. In this case you could exercise them and sell the futures if mm's walk away. Don't fear the black swan. PTJ tripled his money after the '87 crash.

People puking up their positions is a beautiful thing. Imbalances occur quickly and opportunities are greater.

Long only types need to get over the fear of shorting. This "unlimited loss" mantra is about as worthwhile as the suggestion that covered calls are safe or that naked puts are very risky (the two are equivalent). When you lose the fear (not the respect for the potential loss), you'll see that it not only gives you another tool in the trading arsenal but one that lets you stay in the game rather than sitting out the correction or even god forbid, a Black Swan.

kinggyppo · Mar 28, 2011

Quote from blackjack007:

the april 2000 rate cut was intra-day but the MLK 2008 rate cut was after hours. in fact it was announcted on a federal holiday! (a day you'd expect them to not do something like this because you assumed they weren't working.)

I think it came out afterward that SocGen was liquidating that day as well, it was a brutal none stop decline on es.

RichardRimes · Mar 29, 2011

Quote from Eliot Hosewater:

Doesn't the Fed usually announce while the market is open?
.

OMG Eliot..you have been around long enough to remember the FED announcement a few years back 1 hr before market open on EXP FRI that sent the ES up 50 pts and SET was 50 pts higher than the THURs close. In my book that was major enough for a lot of people to blow up! I took a huge loss cause I had prudently closed my put spreads which would have been safe... :mad:

yes I did grab a couple of ES on the way up but it wasn't enough to save me.

I could honestly NOT believe that they would do a surprise announcement not just before market open but on ExPat options!!!!

MTE · Mar 29, 2011

Quote from RichardRimes:

OMG Eliot..you have been around long enough to remember the FED announcement a few years back 1 hr before market open on EXP FRI that sent the ES up 50 pts and SET was 50 pts higher than the THURs close. In my book that was major enough for a lot of people to blow up! I took a huge loss cause I had prudently closed my put spreads which would have been safe... yes I did grab a couple of ES on the way up but it wasn't enough to save me.

I could honestly NOT believe that they would do a surprise announcement not just before market open but on ExPat options!!!!

Someone had a sh*tload of short puts expiring ITM so they called in a favor with the Fed.

...or was it long calls...can't remember.

RichardRimes · Mar 29, 2011

Quote from MTE:

Someone had a sh*tload of short puts expiring ITM so they called in a favor with the Fed.

...or was it long calls...can't remember.

it sure wasn't me...I was on the WRONG end of that trade

:eek: