Filling in the gap story
- DD gapped up Tuesday, rallied to multi-month high
- Put options volume initially heavier than call volume
- Price gaps are just a type of volatility
DuPont de Nemours (DD) made an unusually big move on Tuesday—unusually big for DD, that is.
The chemical specialist not only rallied 10.1% intraday after announcing earnings, it hit its highest level ($68.45) in five months, and gapped higher in the process (Tuesday’s low was above Monday’s high):
Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)
Plenty of stocks gap higher or lower after earnings, and many of them move more than 10%. But in the more than 12,700 trading days since June 1972, DD has formed a daily up gap only 493 times—roughly once every five weeks, on average. Big intraday rallies were rarer—the stock climbed 7.5% or more intraday (and closed higher) only 94 times. And the combination of a big intraday gain and an up gap was rarer still, with only 38 examples before Tuesday.1
Daily price gaps attract attention because they’re often associated with market surprises, good or bad. The implication is that traders and investors weren’t expecting whatever news caused prices to gap higher or lower—which could, depending on the interpretation, fuel an extension or a reversal of a prevailing price trend.
Theory and sentiment aside, price gaps simply represent accelerated price movement—i.e., volatility—even though no trades occur in the gap. The question is, do they matter? In other words, is a big up or down day that includes a gap different from one without a gap?
The following chart offers some insight, at least in terms of the type of move DD made on Tuesday. It compares the stock’s median returns after days it rallied 7.5% or more intraday and closed higher—those that included an up gap (blue) and those that didn’t (red):
Source (data): Power E*TRADE. (For illustrative purposes. Not a recommendation.)
There wasn’t much difference—DD’s one- and five-day median returns were negative regardless of whether there was a gap.
The odds of the stock moving up or down after these days were comparable, too. One day later, DD was lower the next day 60% of the time—with or without the gap. After five days, the stock was lower 53% of the time when there was an up gap, and lower 54% of the time when there wasn’t.
The lesson isn’t that traders should ignore price gaps. After all, gaps represent “volatility alerts”—information that many traders may find useful. But they would be wise to analyze the larger price patterns in which gaps form, rather than jump to conclusions about what a particular gap “means.”
Market Mover Update: December WTI crude oil futures (CLZ2) suffered their biggest down day in more than three weeks, selling off more than 3% to $88.91/barrel.
Today’s numbers include (all times ET): MBA Mortgage Applications (7 a.m.), Preliminary Wholesale Inventories (10 a.m.), EIA Petroleum Status Report (10:30 a.m.).
Today’s earnings include: Rivian Automotive (RIVN), Bumble (BMBL), Beyond Meat (BYND), Wendy's (WEN), Roblox (RBLX), Trade Desk (TTD), D R Horton (DHI), Wynn Resorts (WYNN).
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1 All figures reflect DuPont de Nemours (DD) daily price data, 6/1/72–11/8/22. Supporting document available upon request.