What is Overnight Risk?
Overnight risk is the possibility that events occurring outside trading hours, such as earnings announcements, geopolitical developments, or natural disasters, cause the next day's opening price to differ dramatically from the previous close. Stop-loss orders cannot protect against gaps because there is no trading between the close and the open. A stock closing at $100 with a stop at $95 might open at $80 after a negative earnings surprise.
Gap Examples
During the March 2020 COVID crash, multiple Monday openings gapped down 5-10% from Friday's close. Individual stocks regularly gap 20-30% after earnings misses. Weekend events create the longest exposure window. Even with a stop-loss in place, the execution price during a gap can be far worse than the stop price, resulting in larger losses than planned.
Managing the Risk
Overnight risk cannot be eliminated but can be managed. Limit position sizes so that no single stock exceeds 5% of your portfolio. Reduce exposure before known events like earnings announcements. Lower leverage ahead of weekends and holidays. For long-term investors, overnight gaps are short-term noise absorbed by a diversified portfolio. For active traders, position sizing is the primary defense against gap risk.