Buy on GAP is a pretty straightforward strategy that requires the estimation of previous days lows and the comparison of the opening of each day over a time period to them. It relies on mean reversion and is an intraday strategy since the positions are expected to be closed within the day they were opened.
The strategy suggests the purchase of the 100 stocks out of the S&P500 that have the lowest previous days lows to the current opening price. Computations required:
- Calculate the previous day close to current day open
- Calculate the close to close returns and standard deviations
- Calculate the open to close return for every day
- Check that the above return is less than the 90-day standard deviation of close