An investor holding a short position in a stock currently trading at 60 per share wishes t… — FINRA SIE (Securities Industry Essentials)

An investor holding a short position in a stock currently trading at $60 per share wishes to protect against a potential price surge. The investor wants an order that activates only if the stock price rises to$ 65, but insists that the purchase price to cover the position must not exceed $67. Which of the following order types should the investor place?

Buy Stop-Limit orderAnswer
B
Buy Stop order
C
Buy Limit order
D
Sell Stop-Limit order

Answer

Buy Stop-Limit order

A Buy Stop-Limit order fulfills both requirements: the stop price (

65) acts as the trigger mechanism above the market price, and the limit price (

67) sets the capped maximum price the investor is willing to pay once the order is activated.

Step-by-Step Solution

Identify the investor's position and market objective

The investor has a short position (short stock at $60) and needs protection against a rising stock price.

Short positions sustain losses when stock prices increase, requiring a buy order above the market to cap losses.

Analyze the trigger and execution constraints specified

The trigger price is

65 and the maximum acceptable execution price is

67.

An order that requires a trigger price above current market to activate must be a Stop order, while adding a maximum price cap makes it a Limit order.

Combine the order characteristics to select the correct order type

A Buy Stop-Limit order with a

65 Stop and

67 Limit.

This order remains dormant until the stock trades at

65 or higher, then converts to a buy limit order executable at

67 or lower.

Key Concept

Buy Stop-Limit Orders for Hedging Short Positions

Question

Answer

Step-by-Step Solution

Key Concept

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