Direct answer
A worked example of gap risk shows what happens when the price you expected to trade at is skipped because the market “jumps” between levels. In that situation, your actual fill price can differ from your assumed price, changing profit and loss.
Below is a scenario with explicit assumptions. The goal is not to predict a result, but to demonstrate the mechanics so you can independently verify them with real trade data.
Mechanism and definition
Gap risk is the risk that a trade or position experiences an unfavorable result because the market price moves from one level to another without trading through the intermediate prices. A “gap” is often most visible around events such as market open after a period of no continuous trading, or during sudden announcements.
To model it in a transparent way, separate these elements:
- Planned levels (assumed): the prices you used in your mental or spreadsheet estimate.
- Actual fill prices (realized): the prices your orders execute at.
- Uncertainty: when a gap happens, execution can effectively “skip” your planned level, creating slippage.
Important: a gap is not the same as slippage, but slippage is commonly the practical consequence of a gap for order fills.
Evidence or example (worked scenario)
Assumptions (state everything)
- You want to measure how a stop-like exit could change if execution happens across a gap.
- You hold a position sized at 1,000 units of the traded asset.
- You assume the market would be at 1.2000 if it were continuous.
- You plan an exit at 1.2000, expecting the position value to move as if you could trade there.
- Conversion to profit/loss uses the simple proportional approximation:
- P/L change ≈ (exit_price − entry_price) × units (ignoring currency conversion complexities).
- To isolate gap risk, assume spreads and commissions are zero in both cases.
- A gap event occurs so that the first executable price after your intended level is 1.1980 (a lower fill for a long position).
Baseline (no gap / continuous trading)
- Entry price: 1.2000
- Assumed exit price: 1.2000
- Difference: 0.0000
- Estimated P/L: 0.0000 × 1,000 = 0
Gap case (first fill is worse than planned)
- Entry price: 1.2000
- Actual exit fill after the gap: 1.1980
- Difference: 1.1980 − 1.2000 = −0.0020
- P/L impact: −0.0020 × 1,000 = −2.00
What this illustrates
- In the baseline, your estimate assumed you could transact at the planned level.
- In the gap case, the market skipped intermediate prices, so your exit happened at a different level.
- The loss change comes from the difference between planned exit price and actual fill price.
Limitations and risks (material failure modes)
- Order type and execution rules: The realized fill depends on how orders are handled during fast price changes. The same “gap” can produce different fills across platforms and broker execution models.
- Spreads and transaction costs: If spreads widen during the gap, the loss can be larger than the simple example. The example set spreads to zero to keep the mechanics isolated.
- Liquidity and partial fills: Thin liquidity can cause non-intuitive fills or delays. Your order might not execute at the first visible price.
- Modeling simplifications: The proportional P/L approximation ignores real-world details like instrument-specific contract specifications and currency conversion. A different contract model changes numeric results.
Verification or next question
To verify gap-risk mechanics for a real situation, compare what you assumed with what actually happened:
- Record the planned trigger level (e.g., the stop or target price you used in your estimate).
- Record the actual fill timestamps and prices around the event.
- Compute the difference between planned and realized prices, then recompute P/L with your contract’s actual calculation method.
A useful next question is: Which part of the chain did the jump affect—market price discovery, your order fill, or both? If you can answer that from your own trade records, you can explain gap risk accurately without relying on forecasts.