Cover Limit Order
A Buy to Cover Limit Order is an order used to attempt
to cover (close) a currently open short position at a price
that is lower than the current market price.
Example: Suppose you currently hold 100 shares
of Pfizer (PFE) that you previously Sold Short @ $30 per
share. Assume it is currently trading at $25 per share.
You would like to exit the trade (cover) and take profit
if it reaches $22 or less.
You place a Buy to Cover Limit Order @ $22 on 100
shares of PFE. Now suppose the price trades down to $22.
As long as the price remains below $22 per share, your short
position would then be closed at the next best available
price that is $22 per share or lower, representing a profit
of at least $8 per share ($30-$22).
The main benefit of a Buy to Cover Limit Order is that
you may be able to exit your short position at a price that
is lower than the current market price and you are able
to set a minimum amount you're willing to exit at (your
limit price). Buy to Cover Limit Orders are great
for taking profit on Short positions.
But, if the stock's price reaches your limit price, but
then changes direction to the upside before your order is
filled, you will not exit the trade. Also, if the price
never reaches your limit price, you will still be stuck
with your short position.