SIE practice questionhardStop-Limit Orders
A customer places a sell stop-limit order at 45 stop, 44 limit on a stock currently trading at $50. The stock drops rapidly from $46 to $42 in one trade. What happens to the order?
- AIt executes at $44
- BIt is canceled automatically
- CIt executes at $42
- DIt is triggered but may not execute because the limit price was passed✓ Correct answer
Explanation
Why D — It is triggered but may not execute because the limit price was passed
A stop-limit order has two prices: the stop price ($45) triggers the order, and the limit price ($44) sets the minimum acceptable sale price. When the stock drops through $45, the stop is triggered and it becomes a limit order at $44. However, because the stock gapped from $46 to $42 — skipping past $44 — the limit order cannot be filled at $44 or better. The order remains open but unfilled. This illustrates the key risk of stop-limit orders: they guarantee price but not execution.
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