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