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

Discussion in 'Options' started by Eliot Hosewater, Mar 27, 2011.

  1. 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).
  2. What about 9/11 & 2008-2009?
  3. >> I'm sure anything is possible, but what are the real chances of a major percentage gap these days? <<

    LOL. Famous last words --> "What are the chances?"

    If the odds are one in ten thousand, they mean nothing when you're the one! :)

    I'm suspicious of your results because Yahoo is notorious for bad data.

    If memory serves me right, after 9/11, major indices were down 3-6 pct when the market opened a WEEK later.

    I don't remember the open in '87 but I do remember the chaos. If there's a repeat of that, you'll have to worry about more than just the gap. MM's may walk away. Spreads will widen massively on both stocks and options. IV will skyrocket. Trading will be so fast that you'll be chasing price and using a market order will be suicide but there will be no alternative. You can claim that circuit breakers will kick in but that may mean another gap if there's a halt.

    Remember the Flash Crash last year? What if that hadn't been a flash but only the early part of a free fall?
  4. rdg


    You would be better off using a tradeable instrument for this type of analysis. Its not at all uncommon for a quoted SPX open to be at an untradeable price.

    Taking a quick look at back-adjusted SP data from 1982-present, I see 22 gaps > 2% with the biggest being > 7% on 10/22/1987 and the second biggest of almost 5% on 9/17/2001. There are no guarantees that this data is perfect either, but I would trust it over SPX data.

    Edit: FWIW, 9 of those 22 are gaps up and 5 of the 22 are in October 1987.
  5. 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.

    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.
  6. I believe that biggest one day gap was around April 2000. Nasdaq up about 12% when the fed unexpectedly cut interest rates 1%. This was during the Tech crash of 2000, but the markets continued to slide after. I don't know the S&P and DOW moved that day.

    To answer your question it's rare and could be considered a black swan event, up or down.
  7. Doesn't the Fed usually announce while the market is open?

    What I am really looking for is how much protection does a stop order on index or index ETF options offer? In a regular stock there is the danger that your stop order will get executed the day after the CEO is led away in handcuffs or something. Plus there were horror stories, I think even reported here, about supposedly safe option positions like iron condors or vertical spreads having the short side assigned during the flash crash at a horrible price, but not being able to sell the long side in time. Since the flash crash happened during trading a stop order on the shorts might have been executed well before any real damage was done, but what about overnight gaps on indexes? Like I mentioned in a previous reply one time I actually had an option order executed at a favorable price before the stock market opened.
  8. 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%.
  9. 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.)
  10. rdg


    I've never traded SPX options, so I have no idea how they trade. A while ago I tried testing some systems out on SPX data and when I dug into the trades I was getting I found out they were completely unrealistic. It seemed that when the open was the same as the high or low, both the open and the high/low were likely to be untradeable. I took to only using SPX closes when I had reason to use SPX data at all.
    #10     Mar 28, 2011