Series 7 practice questionhardOrder Types — Buy Stop Orders
A short seller has sold 400 shares of MNO stock at $72 and wants to limit potential losses. The stock is currently trading at $68. Which order should the short seller place?
- AA sell stop order at $75
- BA buy stop order at $75✓ Correct answer
- CA buy limit order at $65
- DA sell limit order at $75
Explanation
Why B — A buy stop order at $75
A short seller profits when the stock price declines and faces losses when the stock price rises. To limit potential losses, the short seller should place a buy stop order above the current market price. If the stock rises to $75, the buy stop order is triggered and becomes a market order to buy 400 shares, closing the short position and limiting the loss. A buy stop order is the mirror image of a sell stop order used by long investors to protect against declining prices.
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