SIE Exam Question 148: Answer and Explanation

Question: 148

An investor has sold short 275 shares of stock PPG at $26 per share. The market currently has PPG trading at $11 per share. The investor sees news of the company that may indicate a price increase over the short term. Which of the following would provide this investor with guaranteed protection against missing a purchase of PPG at a level at which he or she can still make a profit given the short position?

• A. Buy 275 PPG at $21 stop
• B. Unknown without more information
• C. Buy 275 PPG at $32 stop
• D. None of the above

Correct Answer: A

Explanation:

A buy 275 PPG at $21 stop order will allow this investor to pay no more than $21 per share in filling the short position, which has a sell price of $26 per share. A profit will still be made. Conversely, a buy 275 PPG at $32 stop order will enable their order to go as high as $32 a share before being executed, thus potentially eliminating a profit being made by this investor on the short position.