Final answer:
To protect an existing short position, an investor would place a buy stop order. This order is triggered if the price of the asset starts rising.
Step-by-step explanation:
In order to protect an existing short position, an investor would place a buy stop order. This type of order is placed above the current market price and is used to trigger a buy order if the price of the asset starts rising.
For example, if an investor has a short position in a stock that is currently trading at $50 per share and wants to protect themselves in case the price increases, they can place a buy stop order at $51 per share.
If the price of the stock reaches $51, the buy stop order will be triggered, and the investor will automatically buy back the shares, covering their short position.
The buy stop order helps the investor limit potential losses by automatically closing their short position if the price starts to rise.