Gap Analysis         

Gap Analysis

A gap is a discontinuity in the price history of a security. If a company comes out with significant positive news that is released after the close of the day, it can create a surge in demand that causes the price to gap up at the next day's opening, from the previous day's closing price. Similarly, bad news can cause the price to gap down.

Continuation gaps, signalling continuation of the trend, are followed by new highs in an up-trend or new lows in a down-trend.

Exhaustion gaps, signalling the end of the trend, are gaps that are not followed by new highs in an up-trend or new lows in a down-trend.

When you are analyzing potential option positions, it helps to have a computer program like Option-Aid that swiftly calculates volatility impacts, probabilities, statistics, and other parameters of interest. These programs can pay for themselves with the first trade that they help you with.

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