Question

You sell 200 shares of a stock short for $46 per share. You want to limit your loss on this transaction to no more than $1,300. What order should you place? You should place order to 200 shares at s(Choose the correct answer from each drop-down menu and round to the nearest dollar.)

Options:

1. market; stop-loss; limit

2. sell; buy

Answer 1

Answer - You should place a STOP LOSS order to BUY 200 shares at $52.5

Reason -

Amount received from short sale = 200 × $46 = $9,200
Loss = $1,300 = 200 shares * Price - $9,200
Loss = $1300 + $9200 = 200 shares * price

Loss = $10500 = 200 shares * price

Price = $10500 ÷ 200 shares = $52.5 per share

Here the shares are sold at $46 per share, now if the price increases it will cause a loss in transaction. So if we want to stop the loss at $1300 over the sale price, we need to buy the shares and cancel the transaction at $52.5 per share.

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