Gap Risk with Trading Equites

[monkey180]

Hi,

Regarding gap risk with trading equities using leverage.

What is the best way to avoid such a risk on a leverage position? I am on an IG demo, but realising the potential risk of going live with real money trading on margin.

I trade off the 1h, and often have overnight positions until either SL / TP is hit, trades last 1 - 3 days

With options it is cost efficient to have an OTM call about 30 days, to avoid the time decay. Should I just trade options? But as I trade pull backs into support the IV sometimes high.

Or should I, purchase stock on leverage, then purchase OTM put(s), as protection.

Thanks
Freddie

 

[BethanySanders]

Hi,

Regarding gap risk with trading equities using leverage.

What is the best way to avoid such a risk in a leverage position? I am on an IG demo but realizing the potential risk of going live with real money trading on margin.

I trade off the 1h and often have overnight positions until either SL / TP is hit, trades last 1 - 3 days

With options it is cost-efficient to have an OTM call about 30 days, to avoid the time decay. Should I just trade options? But as I trade pullbacks into support the IV sometimes high.

Or should I, purchase stock on leverage, then purchase OTM put(s), as protection.

Thanks
Freddie

Well as far as I know about IG.
At IG, it seeks to minimize transaction costs so that investors are less likely to lose and keep their costs (not just expansion and commission but overnight funding) but at a highly competitive level.
And they limit their maximum leverage based on the product to protect the audience from the potential for win/loss distortions in their transactions.
So if you have even the most severe use of the lever that you are allowed to, of course, avoid an area where the probability of winning or losing is significantly distorted, it will not be very risky at all.

 

[J Livermore]

,

Regarding gap risk with trading equities using leverage.

What is the best way to avoid such a risk on a leverage position? I am on an IG demo, but realising the potential risk of going live with real money trading on margin.

I trade off the 1h, and often have overnight positions until either SL / TP is hit, trades last 1 - 3 days

With options it is cost efficient to have an OTM call about 30 days, to avoid the time decay. Should I just trade options? But as I trade pull backs into support the IV sometimes high.

Or should I, purchase stock on leverage, then purchase OTM put(s), as protection.

If you are new to trading you shouldn’t be using leverage, period. The way to learn is to trade small and keep trading small until you are experienced. Yes, it sounds boring but trading isn’t suppose to be a thrill ride. The purpose of going through your learning curve is not so you can make money right away but to build up your skills so you can make winning trades in the future that will eventually lead to money.

Yes, options are a good way to protect against a gap if the stock goes against you but there are five variables which can change the price of an option. If you are using an out of the money stock option, a change in volatility could change the option’s price more severely than a change in the stock’s movement itself.

In my opinion, you are better off trading as small as you can so if the stock gaps, you won’t get hurt very much. This way you won’t have to keep paying new premiums every time your old option expires.