Stock Options Gap Up Gap Down Strategy: A Complete
What is the Stock Options Gap Up Gap Down Strategy?
The Stock Options Gap Up Gap Down Strategy is a systematic approach to trading stock options based on overnight or weekend price gaps in the underlying stock. When a stock opens significantly higher or lower than its previous close, it creates a “gap” that can offer high-probability trading opportunities. Traders use these gaps to decide whether to ride the momentum, fade the gap, or trade partial gap fills using calls or puts.
TL;DR
Gap up often signals bullish momentum, gap down signals bearish momentum. Using volume, support/resistance levels, and option strike selection improves the chances of a profitable trade.
Understanding Gaps in Stock Options
A gap occurs when the opening price of a stock is different from its previous day’s close, creating a visual space on the chart. This price gap can affect the performance of stock options:
Gap Up → Stock opens higher than previous close, calls often gain value immediately
Gap Down → Stock opens lower than previous close, puts often gain value immediately
Gaps are usually caused by:
Earnings announcements or corporate news
Overnight global market movements
Institutional trading or large block orders
Shifts in investor sentiment
For options traders, recognizing gaps helps in selecting the right strike, timing entry, and defining risk.
Types of Gaps
Not all gaps behave the same. Correctly identifying the gap type is essential to applying the right strategy:
Common Gap – Small gaps in a sideways trend, usually filled quickly.
Breakaway Gap – Occurs after consolidation, signals strong directional move.
Runaway Gap – Appears mid-trend, confirms continuation.
Exhaustion Gap – Appears near trend tops or bottoms, often signals reversal.
Each type of gap determines whether the trader follows momentum or considers a reversal.
Gap Up Strategy in Stock Options
When a stock gaps up, calls and options strategies can be used in multiple ways:
1. Momentum Strategy
Buy call options if the stock opens above the previous day’s high
Confirm move with strong volume
Target intraday resistance levels
Stop-loss below the previous day’s high or nearby support
Key point: Larger gaps with strong volume are more likely to continue upward.
2. Gap Fill Strategy
Wait for the stock to retrace toward previous day’s close
Enter long if the gap acts as support
Works best when the gap is small and not part of a strong trend
3. Reversal Strategy
Consider buying puts if the gap stalls or reverses early in the session
Watch for resistance near the opening high
Place stop-loss slightly above the gap high
Gap Down Strategy in Stock Options
When a stock gaps down, put options and strategies apply in reverse:
1. Momentum Strategy
Buy puts if stock opens below the previous day’s low
Confirm with strong selling volume
Target intraday support or lows
Stop-loss above the previous day’s low
2. Gap Fill Strategy
Observe retracement toward previous close
Enter put options if resistance holds
Profitable if gap partially fills but doesn’t reverse fully
3. Reversal Strategy
Consider buying calls if the price shows strong bounce from gap low
Stop-loss slightly below gap low
Works best near oversold conditions or strong support
Measuring Gap Size
Points: Opening price – Previous close
Percentage: (Gap ÷ Previous close) × 100
Larger gaps often indicate higher volatility and greater option premium movement
Very small gaps are less reliable and often represent normal market noise
Role of Volume in Gap Strategy
Volume confirms the strength or weakness of a gap:
High volume → Gap likely to continue, momentum trades preferred
Low volume → Gap may reverse, consider fading or waiting
Combine volume with price action and intraday charts for better timing
Support and Resistance Levels
Support and resistance improve gap trading accuracy:
Gap up holding above prior resistance → continuation likely
Gap down near prior support → possible reversal
Intraday micro-level support/resistance helps define stop-loss and exit points
Options Strike Selection for Gap Trading
Choosing the right strike is essential:
ATM options → Balanced risk and reward, most liquid
ITM options → Safer, higher probability, but more expensive
OTM options → Cheaper, high reward, lower probability
Strike selection should align with gap type, expected move, and expiry:
Short-term gaps → Weekly options, small targets
Longer-term trends → Monthly options, larger targets
Intraday vs Positional Gap Trading
Intraday Gap Trading
Focus on first 30–60 minutes
Fast-moving positions using ATM or near-gap strikes
Small targets, quick exits
Prefer liquid options with tight spreads
Positional Gap Trading
Hold trades for multiple days if trend is strong
ITM positions for safer exposure
Wider stop-loss allowed
Targets include full gap plus additional trend move
Risk Management in Gap Options Trading
Define stop-loss based on gap size and support/resistance
Avoid over-leveraging positions during volatile gaps
Consider partial profit-taking if the move stalls
Be cautious during earnings announcements or major news events
Common Mistakes in Gap Options Trading
Entering trades immediately at the open without confirmation
Ignoring volume trends
Trading insignificant gaps
Over-leveraging positions
Holding losing trades hoping gap will recover
Ignoring broader market trends
Using same strategy for all gap types
Advanced Gap Trading Techniques
1. Gap Fade
Trade against the gap when reversal signs appear
Works best with common gaps or exhaustion gaps
Wait for confirmation before entering
2. Combining Technical Indicators
Moving averages to confirm trend direction
RSI for overbought/oversold conditions
MACD for momentum confirmation
3. Gap Continuation Patterns
Analyze if the gap is part of a breakout
Confirm continuation with volume and intraday trends
Adjust stop-loss and targets accordingly
Psychological Discipline
Gap trading can be emotionally intense:
Fear → Avoid trading due to sudden moves
Greed → Chasing large gaps without analysis
Impatience → Entering before confirmation
Successful traders rely on structured analysis, patience, and strict risk management.
Key Takeaways
Gap up often signals bullish momentum; gap down signals bearish momentum
Gaps can reverse; identify gap type before trading
Confirmation via volume, support, and resistance is essential
Proper options strike selection improves probability
Stop-loss and position sizing are critical
Intraday and positional gap strategies differ in approach
Patience and discipline separate successful traders from impulsive ones
Final Thoughts
The Stock Options Gap Up Gap Down Strategy offers high-probability trading opportunities when applied with discipline, volume confirmation, and proper strike selection. Whether using calls or puts, success depends on understanding gap types, managing risk, and aligning trades with broader market trends. Consistency and structured analysis make this strategy effective for both intraday and short-term positional trading.
