Question

Suppose that you sell short 300 shares of Starsnow, now selling at $80 per share. a. What is your maximum possible loss? b. What happens to the maximum loss if you simultaneously place a stop-buy order at $89?

Answer 1

In case of short sale, one has to square off the position in future by buying share at market price. If market price at that date is more that sale price, we will have loss.

Part A:

Maximum loss will be infinity. As the share price can be any at the time of purchase.

Loss = Purchase Price - Sale Price

Part B:

If we have stop buy order at $ 89, max Purchas e price can be $ 89 per share.

Max loss per share = $ 89 - $ 80

= $ 9

Max Loss for 300 shares = $ 9 * 300

= $ 2700

Max Loss shall be restricted to $ 2700.