Question

Currently the stock of XYZ Ltd. is selling for $50 per share, which was trading at...

Currently the stock of XYZ Ltd. is selling for $50 per share, which was trading at $55 one week earlier and you are certain that the price will fall further. To take the advantage of this downward price momentum you sell short 1000 share of XYZ Ltd at the current market price. You want to make $6000 profit from this short selling. You place an order with your broker to purchase the shares at a certain price to cover the position. What type of order did you place with your broker and at what price? Explain why.

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Answer #1

Short sell means selling the stock before owning it, meaning selling in advance and buying at lower price than current selling price

Current market price = $50

Target Profit =(Profit Sell now at Current price – Buy at lower price than current price) X no of units

   $6,000=($50- Buy at lower price than current price) X 1,000

$6,000/1,000 =$50- Buy at lower price than current price

$6=$50- Buy at lower price than current price

Buy at lower price than current price= $50-$6

Buy at lower price than current price= $44

Call order to buy at $44 with broker is the right strategy

Buying price $44

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