Gap and Tail Risk

What this unit covers

Understand gap risk, price jumping past your stop-loss overnight, and tail risk, rare extreme moves, and what stop-losses and position sizing cannot fully protect against.

By the end you will be able to

• Explain why a stop-loss shows an instruction, not an exact exit price.
• Describe how gap risk and tail risk can defeat a stop-loss and a position size.
• Apply the habit of asking what situation would make a safeguard fail.

How it starts: The Limit You Set Overnight

1. You hold a stock closing at 495 rupees and set a stop-loss at 480.
2. You go to sleep sure your loss cannot cross that 480 rupee line.
3. Results come out overnight, and the stock opens at 430 next morning.

Words you will meet

Gap risk

The risk that a price jumps past your stop-loss level without trading in between.

Tail risk

The risk of rare, extreme market moves that ordinary tools are not built to absorb.

Stop-loss

An instruction to exit a position once a chosen price level is reached.

Position sizing

Deciding how much of an asset to hold so a normal loss stays within a chosen amount.

In this module: Risk Management in Derivatives

1. Margin and Liquidity
2. Position Sizing and Portfolio Heat
3. Gap and Tail Risk (this unit)
4. Pre-Trade Plan, Stress Test & Review