Question

You short-sell 300 shares of rock creek fly fishing company, now selling for $20 per share. if you want to limit your loss to $1,350, you should place a stop-buy order at ____.

Answer 1

You short-sell 300 shares of rock creek fly fishing company, now selling for $20 per share. if you want to limit your loss to $1,350, you should place a stop-buy order at $24.5.

Given,

300 shares of rock creek fly fishing company are short sold.

now selling for $20 per share.

I want to limit your loss to $1,350.

When an investor borrows security, he or she sells it on the open market with the intention of later purchasing it at a lower price.

Short-sellers wager on and profit from a decline in the price of securities. Contrast this with long-term investors who want the price to increase.

Amount received from short sale =  300 × $20 = $6,000

Let the stop-buy order be at price 'P'.

Loss = $1,350 = 300P − $6,000

$7,350 = 300P,

so P = $24.5

Hence, stop-buy order should be placed at $24.5.

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