Overnight Risk: The Gap That Breaks Your Stop

Stops don’t trigger in a closed market. Gaps ignore your risk script and can turn a modest position into a portfolio breaker by the open.

Managing overnight exposure means sizing positions, hedging, or flattening before the bell so surprises don’t become catastrophes.

Why it matters

Overnight moves bypass intraday controls. Earnings, geopolitical shocks, or liquidity events can reprice assets dramatically before you can react.

Common mistakes

• Holding size through known event risk without hedges.
• Ignoring funding costs on overnight hedges.
• Assuming volatility regimes remain constant after the close.

Implementation steps

Quantify gap risk

Use historical gaps and implied volatility to estimate potential overnight moves.

Plan hedges

Options or futures can offset exposure when carrying positions is necessary.

Adjust budgets

Tighten risk limits or reduce size around events like earnings or macro announcements.

LiquidityAI tie-in

• Pre-close alerts flag positions over gap-risk budgets.
• Policy engine enforces hedging before market shutdown.
• Analytics review gap P&L versus expectations.

Case sketch (composite)

A long position held through an earnings surprise gapped down 12%. After adding LiquidityAI gap-risk checks, the fund hedged with puts ahead of similar events, cutting future overnight losses by two-thirds.

Takeaways

• Overnight risk requires deliberate sizing or hedging.
• Gap risk models guide pre-close decisions.
• Policies enforce discipline when markets sleep.

LiquidityAI provides tools and education for systematic trading. This article is for informational purposes only and does not constitute investment advice. Trading involves risk, including possible loss of principal.