Unique Risks of Using Stop Limit Orders
OptionsHouse is furnishing this document to you to provide some basic facts about stop-limit orders and the risks associated with stop-limit orders. This document is not intended to enumerate all of the risks of using stop-limit orders. If you have any questions about the expiration process, email us at firstname.lastname@example.org.
A stop-limit order is an order to buy or sell at a specified price (or better) after the specified “stop price” has been reached or exceeded. This type of order allows an investor to better control the price at which they enter or exit a position.
Stop-limit orders, however, pose certain risks to you. Once the “stop price” has been reached or exceeded, the order becomes a limit order; however, this does not mean your order will be executed at the limit price. The market could skip your limit price, leaving the order unexecuted.
For example, imagine a scenario where you sell short stock XYZ at $100 and enter a stop-limit order to buy XYZ at $105 to cap your losses. The market moves to $105, however, only one order is executed at that price and the stock continues to move up to $110. Your order was triggered and became a limit order at $105 but was not filled because the market moved away from your limit as soon as the order was triggered. Your losses on your short position are thusly not capped. In fact, your stop and limit price may be skipped entirely, the price of XYZ could go directly from $100 to $110, and your stop-limit would not be filled.