How do you manage gap risk on your overnight stock positions?

For those of you who regularly hold short term stock positions overnight, how do you manage the risk of large gaps?

 

By thinking about what could happen and making sure that your position is of a size that any loss from that event is not going to destroy your account.

 

I recommend growing a pair that commiserates with the size of the trade. Otherwise reduce the size to match your pair.

People lose sleep when they gamble. When they gamble they will always lose in the end. The best gamble strat is to go all in just once and never to do it again. This offers the best odds.

 

First of all, diversification, not all eggs in one basket, that way the hit, whatever it may be, won't get you out of business.

Also dont forget gaps can happen against or in your favor, so mathematically speaking they balance out.

 

You cannot manage the risk other than hedging with options.

 

That sounds like it in a nutshell.

If being a bit more specific... I need to reduce size on each position until comfortable given the possibility of a large (10-80%) gap against.

I was thinking a quarter of the account per position, but an eighth would in fact be more my comfort level.

In the extreme case 1/8 * 80% be would be a 10% loss on the account. Maybe a once per decade event if actively trading.

 

This is a good point.

 

Agree the risk cannot be eliminated. Are options practical / cost effective for hedging 2-20 day positions?

 

If you reduce the size to 1/80th, you are going to start a thread bitching why gaps in stocks are so small. I will then tell you to increase size until the bitching stops.

 

Sadly, when they stopped letting me enter and exit 5 times per day if need be, I stopped trading stocks.

The Gaps against me, with nothing I could do about them just killed me, wonder why they bought this rule in, ohhhh yeah to kill retail