Using stop orders to protect profits on a short sale

Stop orders can be used to protect profits in a short sale. If you sell short a stock at $40 and it drops to $32 you would probably be reluctant to buy a short position again hoping the stock would drop more.

To protect your profits against any sudden raise in prices you should allocate a stop order in $343 to keep the $6 profit per stock.

Equally the use of a stop order can reduce losses under a unfavorable short sale. If you sell short a stock in $15 you could allocate a stop order to cover the $16 short position. This strategy limits the loss in case there were a raise in stock prices. Without a stop order investors would have to face a great loss if stocks raise continues.

With a long position in stocks the most an investor could lose would be its total investment, this in case the company goes bankrupt and stocks turndown to $0 leaving stockholders without anything). Nevertheless with short selling if the price of a stock continues to raise theoretically losses would be unlimited.

Selling short can be risky for those investors that have the guts to observe how their stock prices suddenly change direction. There are rules that rule short sales in the NYSE and in AMEX as well as stocks in NASDAQ.

It will not be possible to make short sales when stocks price turndown because this could worsen it. In the market short sales can be done for higher prices than those of previous negotiations in an up tick or for a price that is equal to that of previous negotiation, but higher than even previous negotiations. Would be zero-plus tick.

What is short interest? Short interest is the number of participations coming from a company stock that has been sold short and that has not been bought again. In other words borrowed stocks have not been re-bought and given back to the one who lent them. Both the NYSE and AMEX as well as NASDAQ publish monthly information about subscribed company´s short sales. These are published monthly on financial newspapers.