SIE practice questionhardBuy Stop Orders
A short seller who sold stock at $50 places a buy stop order at $55. What is the purpose of this order?
- ATo limit losses if the stock rises above $55✓ Correct answer
- BTo lock in a profit if the stock rises
- CTo increase the short position
- DTo convert the short position into a long position at $55
Explanation
Why A — To limit losses if the stock rises above $55
A buy stop order is placed above the current market price. For a short seller, it acts as a protective measure: if the stock rises to $55, the stop triggers a market order to buy back the shares, closing the short position and limiting further losses. It does not lock in a profit because the short sale was at $50 and the buy would be at $55 or higher.
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