How do I handle big overnight gaps?
As I mostly take neutral positions overnight, I've been asked this a lot. So here you go.
1 : Take the right position sizing:
If you have the correct position size then there's nothing to fear from big gaps.
I like to take positions in such a way that I don't lose more than 2-3: incase of a big gap. This provides mental piece.
2: Have a calm mind:
This is of prime importance and somethin where most of the guys have trouble. Constantly panicking is going to do no good. What's going to happen will happen.
Having a calm mind allows you to think and act more clearly.
3: The 3 way rule:
If the markets open a a big gap there are not just going to stay there. Three things can happen.
a) It can go up : In this case you can use the move to recover our money.
b)It can go down : Just like the previous point you can take good advantage of it.
c) It stays there: After a big gap, obviously the IVs will explode. If the market stays then, premiums will be high and it will provide excellent opportunity to play neutral and recover your losses or atleast some part of it.