#85. Stop buy and sell CFA mock morning session

[vicente]

A trader who has bought a stock at $30 is concerned about a downside movement in the stock and would like to place an order that guarantees selling it at $25. Which of the following will most likely help the trader achieve her objective? (GTC = Good-till-cancelled)
A. “GTC, stop 25, market sell” order
B. “GTC, stop 25, limit 25 sell” order
C. “put option buy” market order with a strike price of 25
the answer is C.
Is the answer C because of the word “guarantee”? Because from my understanding a stop 25 sell order will get you an approximate of 25.
am I right?
Also, I’m a bit confused with stop and limit orders. From my understanding, stop orders don’t necessarily mean limiting losses. For example, if the stock is now at 60, and you want to buy it once it breaks the 65 level, you’d put a 65 stop buy order. Am I right? What about limit orders, what do those do?

 

[Saffa]

A stop order is set at a certain price, x, once the stock reaches that price then the stop order is triggered and becomes a market order. So your price will be the next price that the stock trades at. So a stop order does not guarantee a certain price.
A limit order will executes at the price or better. So a stop limit order says that once a stock Reaches a certain price then the stock will execute at the next price as long as it isn’t below the limit price. Does that make sense?
Sometimes stop limit orders are skipped over though, say if u have stop 25 limit 25 sell order and the ticks of the stock are 25.01 then 24.99. That order will not be executed and so does not guarantee the sale
A put if it is executed gives u the right to sell a stock at a certain price. So as long as it is in the money it guarantees u the right to sell

 

[Jehanzaib Zafar]

very well explained by saffa. Put option protects you from any adverse movement in the price of underline beyond the strike price and this is the maximum you can loose. Stop loss is only ACTIVATED when the price reaches that level or fall further below (or go any higher which will be the case with stop buy) but it is not necessarily EXECUTED at that price. I hope it is clear.

 

[vicente]

so… if the stock is now at 60 and i want to buy it as soon as it touches 65, would i then put a stop buy order at 65? or a limit?
i think a limit would be if the stock is now at 60 and i would like to buy it when it drops to say 58.
and if i would like to short a stock, if the stock is at 60, and i would like to short at 62, i’d put a limit.
if the stock i want to short is at 60, and i would like to short it once it goes thru 55, then i’d put a stop sell order at 55.
is anything that i’m saying correct?