# Gap risk

Gap risk is the possibility that a stock’s next available trading price jumps above or below its previous price, causing a fill or loss beyond the level expected.

## What it means

A stock can move sharply between one available trading price and the next, with no opportunity to trade at the prices in between. This often happens between the regular-session close and the next open, but gaps can also follow a trading halt or occur while trading is thin. News, earnings, and broader market events can contribute.

For a pending order, the next available price may differ substantially from the price used to plan the trade. For an existing position, a gap can create a loss larger than the distance to a planned stop level. Gap risk describes this uncertainty; it does not mean every gap causes a loss. The direction of the move and whether the investor holds a position or has an unfilled order both matter.

## How it is calculated

There is no single formula that measures the probability or full financial consequence of a future gap. To describe a gap after it occurs, use:

`Gap (%) = (first available price − reference price) / reference price × 100`

- **First available price:** The price at the next relevant trade, such as the opening price after an overnight close, in US$ per share.
- **Reference price:** The earlier price used for comparison, commonly the previous regular-session closing price, in US$ per share.
- **Gap (%):** The signed percentage change. A positive result is a gap up; a negative result is a gap down.

The absolute value of the result gives the gap’s size without its direction. An opening gap is not necessarily an investor’s execution price: the actual fill depends on the order and available liquidity. A percentage gap also does not, by itself, measure the probability of a future gap.

## Worked example

Assume a hypothetical stock closes at **US$100** per share. An investor holds **100 shares**, valued at **US$10,000** at that close, and has a sell stop order with a stop price of **US$95**.

1. Before the next regular session, news arrives. The first available trading price is **US$90**. The opening gap is `(US$90 − US$100) / US$100 × 100 = −10%`.
2. At US$90, the position’s marked value is **US$9,000**, or **US$1,000** below its closing value. This is an illustrative change in value, not necessarily a realized loss.
3. A conventional sell stop order becomes a market order when its stop condition is triggered. If it fills at **US$90**, the proceeds are **US$9,000** before fees. That is **US$500 less** than the **US$9,500** implied by selling 100 shares at the US$95 stop price.

The US$90 fill is an assumption for illustration, not a guaranteed opening fill. Depending on the broker’s stop-trigger rules and market conditions, the order could fill at another price or remain unfilled. A stop-limit order can restrict the acceptable price but may not execute at all.

## Why it matters before you trade

A pre-trade check can distinguish a planned order price from a price that is actually available after a gap. It can also identify whether an order is exposed to an overnight period, a scheduled announcement, or a possible trading interruption. These checks do not establish where the stock will open.

Position size affects the dollar exposure: the same per-share gap produces a larger dollar change across more shares. Spread, market depth, and trading volume matter too, because a quoted opening price may not be available for an entire order. Historical daily volatility and one-day value at risk can provide context, but neither guarantees a limit on gap losses, especially during unusual events.

## How PreTrAIde uses it

PreTrAIde’s stated quantitative methods do **not** include a separate gap-risk probability or gap-risk score. Its pre-trade analysis evaluates a proposed stock basket before an order is placed using measures including daily volatility, estimated spread, market impact, liquidity, and one-day 95% value at risk. Recent news is among the inputs to its AI layer.

The basket and each line receive a GO, NO-GO, or MODIFY verdict with reasoning and a suggested execution strategy. Those outputs are decision support, not a prediction of a gap or an assurance that an order will fill at a chosen price. PreTrAIde does not place orders; users trade through their own brokers.

## Common mistakes

- **Treating a stop price as a guaranteed sale price:** A stop-market order can fill beyond its stop price after a gap.
- **Equating the opening price with every fill:** Available volume, order type, and timing affect execution.
- **Assuming a limit order removes gap risk:** It limits the permitted execution price, but the order may receive no fill.
- **Using ordinary volatility as a maximum-loss figure:** An exceptional gap can exceed a routine volatility estimate.
- **Counting every gap as a loss:** A gap’s effect depends on its direction and the position or order involved.

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Source: https://pretraide.com/glossary/gap-risk