Risk & volatility

Overnight risk

Overnight risk is the possibility that a stock’s value changes while its main exchange is closed, leaving an investor unable to trade at the previous closing price.

What it means

A stock can close at one price and open at another because information arrives while its main exchange is closed. Earnings announcements, economic news, geopolitical events and developments affecting a particular company can all change what market participants are willing to pay. The difference between the previous close and the next opening price is an opening gap.

Overnight risk applies to a position held across the close and to an order waiting for the next session. After-hours or pre-market trading may be available for some stocks, but access and liquidity can differ from regular trading. A closing price is therefore not a price at which an investor is assured of trading the next morning.

How it is calculated

There is no single formula that captures the probability and size of every overnight move. A useful way to measure a gap after it occurs is:

Opening gap (%) = [(next regular-session opening price − previous regular-session closing price) / previous regular-session closing price] × 100

  • Next regular-session opening price: the price used for the stock’s opening trade in the next regular session, in US$ per share.
  • Previous regular-session closing price: the stock’s closing price in the preceding regular session, in US$ per share.
  • Opening gap (%): the change relative to that close, expressed as a percentage. A negative result indicates a lower opening price.

For an unchanged number of shares, an illustrative change in position value can be calculated as shares held × (opening price − closing price). This gives a US$ change between those two prices, not the actual profit or loss on a trade. An investor’s fill price, fees and any later price movement can change the outcome.

Worked example

Suppose, hypothetically, an investor holds 100 shares of a stock that closes at US$50 per share. The position’s closing value is 100 × US$50 = US$5,000.

Before the next regular session, the company releases news. The stock opens at US$45. Its opening gap is [(US$45 − US$50) / US$50] × 100 = −10%. At the opening price, the 100 shares are worth US$4,500, an illustrative US$500 decrease from their closing value.

The example does not imply that every share could have been sold at US$45, or that the stock would stay at that price. It shows why a US$50 closing price cannot be treated as a guaranteed exit price after the market reopens.

Why it matters before you trade

An overnight gap can bypass a price level an investor had in mind. For example, a stop order triggered at the next open may execute at a price different from its stop price; a stop-limit order may not execute at all if its limit cannot be met. Neither order type removes overnight risk.

Position size affects the US$ exposure to a given gap: the same US$5-per-share move changes the marked value of 10 shares by US$50 and 1,000 shares by US$5,000. Short positions can also be affected by an upward gap. Before placing an order, a pre-trade check can identify whether the position may remain open through a known event and distinguish possible opening-price changes from ordinary trading costs.

How PreTrAIde uses it

PreTrAIde does not specify a separate overnight-risk measure or claim to forecast the next opening gap. Its pre-trade analysis assesses a proposed stock basket before an order is placed, using quantitative measures including daily volatility and 1-day 95% value at risk, alongside recent news and analyst ratings. It returns a risk assessment and a GO, NO-GO or MODIFY verdict for the basket and each line, with plain-language reasoning. Those outputs are decision support, not recommendations or guarantees about overnight prices.

Common mistakes

  • Treating daily volatility as an overnight-gap forecast. Daily price variability does not tell you the next opening price.
  • Assuming a stop price is guaranteed. An order can be triggered after a gap and fill at a different price, or not fill if its limit is unmet.
  • Ignoring the position’s size. A modest percentage gap can represent a substantial US$ change for a large holding.
  • Confusing a price change with a realized loss. The opening-gap calculation does not establish an investor’s actual execution price or final outcome.

Frequently asked questions

Can a stop-loss order protect against overnight risk?

A stop order does not guarantee execution at its stop price. If a stock gaps past that price, the resulting fill may differ; a stop-limit order may remain unfilled.

How do you calculate an overnight gap?

Subtract the previous regular-session closing price from the next regular-session opening price, divide by the closing price, and multiply by 100. The result is a percentage, positive for a higher open and negative for a lower one.

Does value at risk measure overnight risk exactly?

No. A 1-day value-at-risk estimate summarizes potential loss under a model and confidence level; it does not guarantee a maximum loss or identify the next opening gap.

Related terms

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. Event risk Event risk is the possibility that a specific announcement or occurrence causes an abrupt change in a stock’s price, liquidity or trading conditions. Daily volatility Daily volatility is the estimated standard deviation of a stock’s returns over one trading day, usually expressed as a percentage of its price. Value at risk (VaR) Value at risk (VaR) is an estimate of the loss threshold that a position or portfolio is expected to exceed with a specified probability over a specified time horizon. Stop order Stop order is an instruction that becomes a market order when a specified stop price is reached, so its execution price can differ from the stop price. Pre-trade analysis Pre-trade analysis is the assessment of a proposed stock order or basket before placement, estimating execution costs, liquidity and risk to inform the investor’s decision and execution approach.

Risk & volatility

Volatility Historical volatility Implied volatility Annualized volatility Parkinson volatility estimator Yang-Zhang volatility estimator GARCH model Expected shortfall (CVaR) All glossary terms →

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Educational content, not investment advice. PreTrAIde is analysis software, not a broker: it never executes orders, and its verdicts are decision support, not recommendations to buy or sell.