Chapter 04 · Section 4.1

Strategy

Imagine you hear the following:

"My strategy is to systematically place stop-limit orders to limit possible losses and to protect my unrealized profits. Suppose, I am long a put and the price is 5 1/2. I place a stop limit sell order at 5 1/4. In this way I am sure that I will under no circumstances lose more than 1/4."

Is this statement accurate?

• a) no
  Yes. There is no guarantee that a stop limit order will be executed at the stop limit price (5 1/4). The investor's loss can therefore well be greater than 1/4. Even a stop-loss order, although guaranteeing execution at some price. Continue
  b) yes

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