Chapter 04 · Section 4.1
Stop Orders -Buy
Suppose you have written 3 CBOE BankAm June 15 calls at 1 1/2 You place the following stop order: Buy 3 CBOE BankAm June 15 calls stop-loss 3 1/2 GTC
Three weeks pass and Bank of America June 15 calls now trade at 3 1/8. Should the floor broker buy?
a) no
b) yes
The stop order is usually a sort of safety valve, to exit from a losing position and minimize losses. The objective is not to buy or sell, but to buy or sell only if the situation turns bad.
A buy-stop order is placed above current price levels.