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What a Gap Down Actually Does to the Market, 15 Years of Data
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0:00lesson
Gap down analysis for zero delta traders
- Gap down days are analyzed for zero delta traders
- Historical SPX gap down data over 15 years
- Gap down defined as >0.5% decline
- 13% of days show >0.5% gap down
- Large gap downs (1.5%+) occur 2% of days
2:10lesson
Average performance of gap down days
- Open to close SPX returns are flat on average
- No significant upward or downward bias
- 53% of gap down days close above open
- Larger gap downs show similar patterns
- Long-term average return is ~0%
4:24lesson
Trading range expansion with gap downs
- Larger gap downs lead to wider trading ranges
- Range expands exponentially with gap size
- 1.5% gap down range is 1.4-2.4x all-day range
- Worst 10 days show 2.5-4.5x range
- Volatility increases with gap magnitude
6:40lesson
VIX response to overnight gap downs
- VIX jumps significantly after gap down days
- Overnight gap down boosts implied volatility
- Intraday VIX increase is smaller than overnight
- VIX jump can reach 20+ points overnight
- Volatility spikes are more pronounced with larger gaps
8:49lesson
Probability of consecutive gap down days
- 20% chance of gap down on next day after gap down
- 17% chance after any down day
- 13.6% chance of gap down on any day
- Second gap down day is independent event
- Rare to see two consecutive gap downs
10:44lesson
Gap closure probabilities and timing
- Only 10-15% chance of gap closure in one day
- 18-25% chance of touching gap in one day
- 55-60% chance of gap closure within a week
- Longer duration options have higher closure chances
- Expect higher volatility with larger gaps
12:48lesson
Strategic implications for zero delta traders
- Expect wider volatility with larger gaps
- Close positions faster on gap down days
- Avoid holding to expiration on high volatility days
- Gap closure is unlikely within one day
- Longer duration options have better closure chances
14:46lesson
Summary of gap down behavior for zero delta traders
- Daily SPX performance is flat on average
- Larger gaps lead to wider trading ranges
- Volatility spikes are more pronounced with larger gaps
- Gap closure is unlikely within one day
- Strategies should account for higher volatility
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