Buy to Cover Stop Order

A Buy to Cover Stop Order is very similar to a Buy Stop Order, the only difference being this type of order is used to exit a Short position rather than enter a Long position.

A Buy to Cover Stop Order is an order to cover (repurchase the shares you have borrowed) at a price above the current market price. Once a stock's price trades at or above the price you have specified, it becomes a Market Order to buy (cover).

Example: Suppose you currently have Sold Short 100 shares of Apple Computer (AAPL) at $160 and the stock's price is currently at $150. You want to protect yourself against a large move higher to guarantee yourself some of your current profit ($10/share).

You place a Buy to Cover Stop Order @ $155 on AAPL. Suppose AAPL then proceeds to trade up to $155. At that time, your order would become a Market Order to buy (cover) and your order would be filled at the next best available price.

This type of order is typically used to protect against large losses if you have a Short position and the price of that stock rises rapidly higher, you would then exit that position. It is also used to protect profits on an existing Short position that has moved down already (as in our example above).

But, once your stop price is reached and your order becomes a Market Order to buy, you may be filled at a price higher or lower than your stop price.

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