So I saw this question in Schweser and am confused ,
Adams owns 100 shares of Brikley stock, which is trading at $86 per share, and Brown is short 200 shares of Brikley. Adams wants to buy 100 more shares if the price rises to $90, and Brown wants to cover his short position and take profits if the price falls to $75. The orders Adams and Brown should enter to accomplish their stated objectives are: Adams Brown A. Limit buy @ 90 Limit buy @ 75 B. Limit buy @ 90 Stop buy @ 75 C. Stop buy @ 90 Limit buy @ 75 CAn someone please explain to me why it is C? Thanks.
A stop buy order @90 is an order that is triggered if the price increases up to 90 or above from below.
In other words, if you submit a stop order @90 when the price is 86, it will rest on the market (or the brokerage) servers until the price becomes 90 or higher. At that point the order becomes a market order and it’s executed.
“Stop” is usually the order when you want to cut your losses. “Limit” is usually the order when you want to take new position or take your profit.
‘Stop Buy’ will be when you have shorted the underlying and market is going up. Now, you want to cut your losses by buying when a threshold is crossed on the up side. So, a stop buy executes when the price is at or above a threshold.
‘Stop Sell’ will be when you are long the underlying and market is going down. Now, you want to cut your losses by selling when a threshold is crossed on the down side. So, a stop sell executes when the price is at or below a threshold.
‘Limit Buy’ will be when you want to open a new long position or you have shorted the underlying and market is going down. Now, you want to open your new long position at a lower price than the current market price or you want to take profit by buying at a lower price than current market price. So, a limit buy executes when the price is at or below a threshold.
‘Limit Sell’ will be when you want to open a new short position or you are long the underlying and market is going up. Now, you want to open your new short position at a higher price than the current market price or you want to take profit by Selling at a higher price than current market price. So, a limit sell executes when the price is at or above a threshold.