Question

You short-sell 200 shares of Rock Creek Fly Fishing Co., now selling for $50 per share. If you wish to limit your loss to $2,500, you should place a stop-buy order at ____.

Answer 1

To limit a loss to $2,500 on a short sale of 200 shares initially sold at $50 each, a stop-buy order should be placed at $62.50. This is calculated by dividing the total desired maximum loss by the number of shares and adding the result to the initial sale price per share.

Step-by-step explanation:

To determine at what price you should place a stop-buy order to limit your loss to $2,500 when short-selling 200 shares, you first need to understand that a stop-buy order is placed to buy back the shares if the price goes up to a certain level, thus limiting your potential loss from the short sale.

Currently, the shares are sold short at $50 each. If the maximum loss you are willing to take is $2,500, you would calculate the price at which the loss would be $2,500 if the price per share rises:

• First, determine the loss per share that would amount to a total loss of $2,500: $2,500 / 200 shares = $12.50 per share.
• Next, add this loss per share to the short sale price to find the stop-buy order price: $50 + $12.50 = $62.50.

Therefore, you should place a stop-buy order at $62.50 to limit your loss to $2,500.