Gap Risk

Gap risk refers to the potential for an asset's price to jump suddenly from one level to another without trading at the prices in between. This often happens during market openings, news events, or extreme volatility.

For a trader with a stop-loss order, gap risk is significant; if the price "gaps" through the stop-loss level, the order may be executed at the next available price, which could be much worse than the intended stop level. Managing gap risk requires awareness of upcoming events and, in some cases, avoiding holding positions through highly uncertain periods.

It is a major component of downside protection analysis in derivatives and highly volatile markets.