Futures Gap Trading

Markets are not perfectly efficient, especially across closed periods. Gaps occur because: 1) the ASX cash market is closed for about 18 hours daily while global markets trade, 2) news and events happen overnight affecting sentiment, 3) the SPI 200 night session and global futures provide overnight price discovery, 4) opening-auction orders from overnight analysis create imbalances. Gaps represent the cash market's adjustment to overnight information - and because the SPI 200 future trades overnight, it has usually already moved to reflect that information by the time the cash market opens. They're a feature of the cash market's discontinuous trading, not a market failure.

No. Be selective: 1) trade gaps meeting the minimum size threshold (< 0.1% gaps are noise). 2) Skip gaps on news-heavy days until you're experienced with event gaps. 3) Prefer common gaps for filling, which are easier to identify. 4) Skip Monday morning gaps initially (the weekend creates uncertainty). 5) Start with 2-3 gap trades per week, focusing on the highest-probability setups. Quality over quantity.

This is a normal risk in gap trading. Protection: 1) your stop is beyond the gap extreme + a buffer, so you have a defined maximum loss. 2) Don't add to a losing position hoping for a reversal. 3) If stopped out, don't immediately re-enter the same direction - the gap may be a breakaway type. 4) Accept that some gaps don't fill the same day. Your stop protects against a catastrophic loss while allowing the thesis time to work.

Most gaps (70-80%) fill eventually, but 'eventually' can mean days, weeks, or months. Breakaway gaps starting major trends may never fill. For intraday gap trading, focus on same-day fills of common gaps. Don't hold positions for days expecting old gaps to fill. Each day is a fresh trade - if the gap doesn't fill today, reassess tomorrow. Some professional systems track multi-day gap fills, but this requires different capital management.

Quick identification framework: 1) Was there a major overnight news/event? If yes, likely breakaway or continuation, not common. 2) Is the gap within the previous day's range? If yes, likely a common gap (fill). 3) Is the gap beyond key support/resistance? If yes, potential breakaway. 4) Check volume in the first 5-10 minutes: high volume = conviction behind the gap; low volume = common gap. 5) When uncertain, wait and observe - gap behaviour in the first 15-30 minutes clarifies the type.

The A-VIX significantly impacts gap behaviour: 1) Low A-VIX (< 12): a more predictable market, gaps fill more reliably (75%+ fill rate). 2) Normal A-VIX (12-16): standard fill rates (~70%). 3) High A-VIX (> 16): erratic behaviour, gaps may extend further or whipsaw, lower fill rate (55-60%). 4) An A-VIX spike: gap behaviour is unreliable, consider skipping gap trades. Track your gap fill rates by A-VIX regime and adjust strategy accordingly. (The A-VIX generally runs lower than other volatility indices, so the thresholds sit lower.)

Statistical analysis shows: 1) Monday: lower fill rates (~65-68%) due to weekend news accumulation and uncertainty. 2) Tuesday-Thursday: highest fill rates (~75-80%), most predictable. 3) Friday: moderate fill rates (~70%), traders may be positioning for the weekend. 4) Around the quarterly roll: erratic behaviour, take extra care. Start by focusing on Tuesday-Thursday gaps. Add Monday/Friday after gaining experience.

The previous day's range provides key reference points: 1) Gap opens at the previous high (gap up) or low (gap down): strong support/resistance nearby, a good fade-entry level. 2) Gap opens beyond the previous range: potential breakaway, don't fade blindly. 3) Gap into mid-range: a typical common gap, moderate fade opportunity. 4) Calculate the gap size relative to the previous range: a gap > 50% of the previous range is a significant move. Use the previous high/low as natural support/resistance for stop placement.

Partial fill approach when: 1) the gap is medium-sized (0.3-0.7%) and may not fully fill the same day. 2) Time is approaching midday with an incomplete fill. 3) Price is approaching support/resistance within the gap zone. 4) Your P&L is positive but momentum is stalling. Full fill approach when: 1) a small gap (< 0.3%) - high probability of a full fill. 2) Strong rejection from the gap extreme with momentum toward the fill. 3) The gap is clearly a common type with no catalyst. Default to the partial fill strategy for consistency.

Key differences: 1) single stocks gap most cleanly because they don't trade overnight - whereas the SPI 200 future drifts overnight, so the index 'gap' is largely pre-priced by the open. 2) Single-stock liquidity is lower, with wider spreads at the open and more slippage. 3) Stock gaps can be larger and stock-specific (results released pre-open in February/August, US-sector leads, company news). 4) Index gaps reflect broad sentiment; stock gaps can be idiosyncratic. Approach: the SPI 200 future is the cleanest, most liquid index vehicle (trade the cash-open dislocation via the future); for stocks, only trade large-cap liquid names via the stock or a LEPO, require a larger gap threshold, and be more patient with fill time.

Model components: 1) Dependent variable: binary (filled/not filled) or time-to-fill. 2) Independent variables: gap size percentile, gap vs the previous range, A-VIX level, day of week, overnight SPI 200 session volume, the previous day's trend, distance from key levels. 3) Method: logistic regression for probability, survival analysis for time-to-fill. 4) Training: a minimum of 500 gaps over 3-5 years. 5) Validation: out-of-sample testing, walk-forward analysis. 6) Output: a probability score (e.g., 75% fill probability) informing position size and confidence. Update the model quarterly with new data.

Strategy by scenario: 1) High-probability fill (common gap, low A-VIX): sell OTM options in the gap direction - short calls for a gap-up fill, short puts for a gap-down fill. Theta decay helps. 2) Breakaway gap continuation: buy ATM options in the gap direction for leveraged directional exposure with defined risk. 3) Uncertain gap resolution: buy a straddle/strangle - profits from a large move either direction. 4) Gap fill with hedged exposure: buy a put (gap up) or call (gap down) as insurance while fading with futures. Note that XJO index options are European and cash-settled (no early assignment), while single-stock options are American. Consider the IV level - options are often expensive at volatile opens.

Framework: 1) US gap impact: if S&P 500 futures move strongly, expect a correlated SPI 200 overnight move and cash-open gap. 2) Asian correlation: if Japan/Hong Kong are already trading the move, the ASX is likely to follow. 3) Currency: the AUD (a commodity currency) can signal risk sentiment and resource-sector gaps. 4) Commodity gaps: iron ore, coal, LNG and gold gaps can move the big miners (BHP, RIO, FMG) and the resources-heavy part of the index. Strategy: build a dashboard tracking overnight moves in correlated markets. Strong multi-market alignment increases gap continuation probability; divergence (the ASX gapping against the global direction) increases fill probability.

Integration approach: 1) Allocation: gap trading is typically 10-20% of a systematic portfolio. 2) Correlation: gap trades are short-term, with lower correlation to multi-day strategies - good diversification. 3) Risk budget: a daily gap-risk allocation (e.g., a maximum of 2% of capital at risk in gap trades). 4) Performance attribution: track gap P&L separately from other strategies. 5) Regime adaptation: reduce the gap allocation in a high A-VIX or trending market where fills are less reliable. 6) Edge monitoring: track fill rates monthly; if degrading, reduce the allocation or pause.

Warning signs: 1) the fill rate declining consistently (e.g., from 75% to 60% over 3 months). 2) Average fill time increasing (gaps taking longer to fill). 3) False breakout rate increasing (gaps starting to fill then reversing). 4) Strategy drawdown exceeding historical norms. 5) Market structure changes (new trading hours, product changes). Response: reduce position sizes, tighten the criteria (only the highest-probability setups), investigate the cause. Edge decay can be temporary (a market phase) or permanent (a structural change). Adapt or pause until conditions improve.