Examkin

Question

Difficulty: EasyTypes of Orders and Order Execution Strategies

An investor who currently holds a short position in a corporate stock wants to limit potential losses if the stock's market price rises unexpectedly. Which of the following order types is specifically used to protect a short stock position?

  1. Buy Stop orderAnswer
  2. B
    Buy Limit order
  3. C
    Sell Stop order
  4. D
    Sell Limit order

Answer

A Buy Stop order
A Buy Stop order is entered above the current market price. If the market rises to or above the specified stop price, the order is triggered and becomes a market order to buy, allowing the investor to cover the short position and lock in a maximum loss level.

Step-by-Step Solution

1
Identify the risk associated with a short stock position.
A short position loses money when the stock price increases.
Short sellers borrow stock to sell now and must buy it back later to cover the position.
2
Determine which order instruction triggers a buy order when prices rise above a set threshold.
A Buy Stop order is placed above the market price and becomes an active market order to buy once triggered.
This guarantees execution to close out the short position quickly and limit further loss.

Key Concept

Order Execution Rules for Protecting Short Positions
Rate this question

Topics

Types of Orders and Order Execution Strategies