Series 3: 6.3.1.3.1. Buy And Sell Stop Orders

6.3.1.3.1. Buy and Sell Stop Orders

Investors and traders place sell stop orders below current market prices to protect against a large drop in a futures contract’s price or to protect gains in a long position. Investors may place a stop order once a contract achieves a desired gain—the stop order protects the gain if the contract starts to decline.

Conversely, investors and traders place buy stop orders above current market prices to protect from short sale losses. A short sale opens the investor up to unlimited losses if the price of the futures contract increases rather than decreases. Placing a buy stop order can curb losses by placing an order to buy the shorted contract if the price goes above a certain trigger.

Example: A speculator shorts 100 December hard red wheat contracts at 494’4, expecting market prices to fall. Three months later that contract is selling at 480’0. Thinking it