If you are short a stock, which of the following 2 orders are appropriate to limit...
If you are short a stock, which of the following 2 orders are appropriate to limit your risk?
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Buy a Call Option or Put in a Buy Stop above the market |
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Sell a Call Option or Put in a Sell Stop below the market |
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Buy a Put Option or Put in a Buy Stop below the market |
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Buy a Call Option or Put in a Buy Stop below the market |
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Buy a Put Option or Put in a Buy Stop below the market |
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Buy a Put Option or Put in a Sell Stop above the market |
Homework Answers
Solution:
If You are short of a Stock then : Buy a Call Option or Put in a Buy Stop above the Market.
Explanation: In the case of short of a stock buyer will gain if the price of the stock goes down. The Short Seller will have the risk, if the price goes up. Hence , to limit the risk, short seller can buy a call option, so that in the situation of price rise he will be hedged by call option. As the other option , short seller can put in a Buy Stop order to exit the trade to limit the risk.
For Example : If a person short Stock M at $ 50, then he can either take call option of $ 50 so that if price goes above $ 50, the risk will be limited. As the other option he can Put in a Buy Stop above 50 the market , that means buy if price goes above $ 50.
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