Question

You sell 200 shares of a stock short for $48 per share. You want to limit your loss on this transaction to no more than $1,100. What order should you place? You should place a nearest dollar.) order to 200 shares at S Choose the correct answer from each drop-down menu and round to the

Answer 1

Short selling of shares is to sell shares without holding the stocks, with an intent to buy back shares of the same quantity at lower share price on the same trading day.

Risk involved: After stock is sold, if the stock price rises, then there is potential loss to square off the position.

So will limit the loss using Stop loss order.

Stop loss order limits the loss in the trade, when the stock price has adverse movement against the expected movement.

Here, stop loss order should be placed to limit loss on 200 shares by buying them back at $53.50

Explaination:

First Leg: Sold 200 shares short at $48 per share with the intent of buying back the shares at price lower than $48 (ie; say $45) to make profit when price falls.

But if stock price goes up $55, then has to buy at price higher than the selling price.

Maximum loss that can be taken = $1,100

i.e; maximum loss per share accepted = $1,100/200 = $5.50

Sold value = 200 * $48 = $9,600

So if Stock is Sold at $48 then maximum permissible buy price = $48 + $5.5 = $53.50 Hence a limit order to stop the loss is to be placed to buy back at $53.50 for 200 shares.