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
b) yes
The investor claims he can be sure that he will not lose more than 1/4. Can he be sure?
For the strategy to work out, the broker must be able to execute the order when the price falls. Can the broker guarantee the execution of a limit order?