Buy Stop Orders: Mechanics and Short Position Protection
A trader sells short 500 shares of XYZ at $70. To limit potential upside losses if the stock rallies, the trader enters a Buy Stop at $75. If XYZ trades at 74.50, then 75.10, then 75.30, what happens?
A Stop order is a two-step process: (1) Trigger (Election): when the stock trades at or through the stop price ($75.10), the order is triggered.
Complete Analysis & Legal Rationale
A Stop order is a two-step process: (1) Trigger (Election): when the stock trades at or through the stop price ($75.10), the order is triggered. (2) Execution: the stop order immediately becomes a MARKET ORDER and executes at the very next available market price (75.30).
Distractor Autopsy (Why Other Options Are Traps)
FINRA exam writers design incorrect distractors using specific calculation mistakes and regulatory misconceptions. Review why each option succeeds or fails:
Triggered at or above $75.00, executes immediately as a market order at 75.30.
A stop order does not guarantee execution at the stop price.
Stop orders trigger when price exceeds the stop; they do not cancel.
Buy stop orders convert into market orders, not sell limits.
Official Standard: Two-step stop order trigger and execution rules.