Entry on gaps – What happens if the stock gaps up or down beyond the specified entry price?
At times, stocks will gap above or below our entry point. A gap in the direction of our calls confirms strength and it is usually a good thing. Because the gap increases the distance between our entry point, stops loss and the actual entry point, it increases our risk and decreases our potential reward. For example, a LONG call at 20 with a stop at 19.80 and a target at 23, has 3 points potential with 0.20 risk. If the stock gaps to 20.50, our risk becomes 0.70 and our potential is down to 2.50. Because of the increased risk and decreased reward, we suggest trading half the shares you planned on. If you planned on 1000 shares, trade only 500 at the open. If the stock keeps going up, double your position. If the stock breaks below the low of the day, exit your position.
