We are near the end of earnings season and a few stocks such as Lowes and Target have left large price gaps on their charts after releasing earnings that were disappointing. Some of our best ideas for studies come from our viewers and many of our viewers wanted to know if there was something we could learn from the data. When a stock sees a 2 or 3 Standard Deviation (SD) downward or upward move and leaves a gap on the chart, how likely is it that the gap will be filled and about how long it will take?
Our study was conducted in using data from 100 liquid underlyings from 2000 to the present and represented about 350,000 occurrences. We identified all 2 and 3 SD moves that left a gap. For this study, a gap is when the stock makes a 1 day move that is larger than 95% of all its past moves. We then tested whether the gap was filled after 1, 5, 10, 15, 25 or 45 days following the outlier move.
A table displayed the results. The table showed that on 2 SD moves the gap was filled more than 50% of the time after 15, 25 or 45 days. The table showed that there was some time to wait and that action was not necessary the next day. Tom noted that given enough time you are good to go, this is an argument for selling Implied Volatility (IV) into the heightened part of these moves.
For more information on Stock Price Gaps see:
Market Measures from August 7, 2014: "Gaps in Stock Prices"
Market Measures from April 14, 2015: "Gap Reversals"
Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the valuable takeaways and the in depth study results on whether there is any advantage in selling premium into stock trading gaps and expecting the gaps to be filled.
This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.
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