Answer-first summary for fast verification
Answer: d) Stop-limit to BUY stop at $40 and limit at $45 (buy stop limit)
To cover a short position when the price rises to $40, you need a **buy stop-limit order** with a stop at $40 and a limit at $45. The stop triggers the order when the price reaches $40, and the limit prevents execution above $45.
Author: Manit Arora
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Q-149.2. Assume you have a SHORT position in a stock with a current market price of $35. If the stock in the future should move against you, your goal is to exit the short ("cover the short") position if the stock reaches $40; however, you don't want to exit above $45 as the losses above that level would be too great. Which order BEST meets your goal?
A
a) SELL market order at $40
B
b) BUY stop order at $40
C
c) Stop-limit to SELL stop at $40 and limit at $45 (sell stop limit)
D
d) Stop-limit to BUY stop at $40 and limit at $45 (buy stop limit)
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