A sell limit order allows you to control the price at which you sell stock. Instead of selling at the current market price, the sell limit order instructs your broker only to sell once your stock hits a certain price point. For example, if you have a sell limit order of $95, your broker cannot sell unless the stock rises to $95 or higher.

Similarly, you can create limit orders on stock purchases which instruct the broker not to buy stock until it falls to a certain price. In this case, your limit order of $95 would instruct your broker not to buy the stock until its price falls to $95 or lower.

Limit orders are not exact price orders. In other words, they don’t tell your broker to buy or sell at exactly $95 but only if the stock exceeds that price (in a sell limit order) or falls below it (in a buy limit order).

What Is The Difference Between A Sell Stop and Sell Limit?

A sell limit tells your broker only to sell shares of your stock once a specific price becomes available. You cannot set your sell limit below the current market price, as the current price would be better than your sell limit price.

A sell stop order tells your broker to sell the shares once a certain price point has been hit. You can set sell stop orders below market price so that if your stocks go down instead of up, it will trigger a sale of those stocks.

Some orders are stop-limit, meaning once your stock hits the stop sell price, it triggers a limit order. This can be risky if the limit order price isn’t the same as the stop sell price because you may find yourself in a situation where you want to sell but there are no buyers at your limit price.

For example, if your stop sell order is $85 and your limit order is $86, then if the stock drops to $84 it will trigger the stop order, yet you won’t be able to sell because $84 is below your sell limit price.

You also risk losses due to partial fulfillment with stop-limit orders. For example, suppose your limit order is to sell 800 shares at a certain price but only 350 shares are available at that price. You’ll only be able to sell 350 shares and may incur losses on the unsaleable portion of your investment.

Sell limit orders are visible to the market, while stop sell orders are not visible until they are triggered.

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What Is A Sell Limit Order Example?

Suppose you have shares of stock in company XYZ. It is currently trading at $135 and you want to sell only if the stock goes up to $143.

In this case, you would set a sell limit order of $143. This tells your broker not to sell unless the stock hits that price.

However, if the stock exceeds expectations and surges up to $155 overnight, it will trigger a sale because $155 exceeds the sell limit order of $143.

What Is The Difference Between A Stop Order and a Limit Order?

In addition to stop sell and sell limit orders, you can put stop and limit orders on purchasing stock. These work similarly to stop sell and sell limit orders but refer to purchasing instead of selling.

A limit order tells the broker not to buy shares of a particular stock unless the price falls below a certain point. For example, if you want to buy shares in company ABC only when they fall below $75, you would set a limit order of $75 on that stock.

You cannot put a limit order to buy above the current market price because there is already a better price available. For example, if company ABC is currently selling at $65, you can’t put a limit order of $75 on it.

Stop orders, on the other hand, can be set above the current market price. Stop orders merely tell the broker to buy once the stock hits a certain price point. This can be helpful if you have your eye on a stock that is expected to rise.

You can set a stop order to purchase shares once the stock rises to a certain level so that you can enter in a stronger position.

When you use a stop order, you risk losses if the stock falls far below your stop order. For example, if you have a stop order on XYZ stock of $75 and the stock price falls to $60, you will end up selling at that lower price point.

Stop orders are not generally visible in the market. However, some brokers add “stop on quote” to their order types. This makes it clear that the stop order will only be filled if a valid quoted price is met.

How Long Does It Take For A Limit Order To Execute?

Your limit order is filled when the market opens at the price point you have specified.

That means that if you have a sell limit order of $70 on a particular stock and that stock opens at $75 the next morning, the sell limit will be executed.

However, if the stock opens at $65, the sell limit will not be executed until the next business day even if the stock appears to rise in price over the course of the day.

Which Broker Is Best For Limit Orders?

Most brokers cater to the various types of order entries, including:

• Market orders
• Buy stop orders
• Sell stop orders
• Buy limit orders
• Sell limit orders
• Buy stop orders
• Sell stop orders

But all brokers are not created equal. For example, Robinhood sells customer data to intermediaries, who can see which orders they are placing. The plus is that the cost of placing market orders, limit orders, or any other type of order on Robinhood is commission-free.

The downside is you may not necessarily be receiving the best fill price. And that’s probably not a big deal if you plan, for example, to buy Amazon stock or Netflix stock and hold it for the long-term. What’s a few pennies between friends!

But if you plan to trade shorter term and more frequently, the difference between a few pennies here and there in order fills can be significant, and really add up over time.

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The article What Is A Sell Limit Order? was originally posted on Investormint

If you invest regularly in the stock market, you might be curious about what a synthetic long call is. Don’t be intimidated by this term! It sounds complicated, but when you take a closer look at it, it’s not.

We’ve put together some information for you about what a synthetic long call is and when to use it. Read on to learn how to use it.

What Is A Synthetic Long Call?

A synthetic long call mimics the performance of a long call option, albeit by combining different securities.

A synthetic long call is created when a long put is purchased for every 100 shares of stock you own. This replicates the payoff you would get if you purchased call options alone.

On the plus side when you use a synthetic long call, you still get the benefits of being a stockholder, such as the right to vote in stockholder meetings and the right to receive dividends (which you would not enjoy if you purchase call options).

The downside is the transaction costs may be higher because a synthetic call requires two transactions, the purchase of long puts and shares, versus just one transaction cost when buying long calls directly.

Investors use synthetic long calls when they want to hold onto a stock for a long period of time that they fear may go down in the short-term. Using a synthetic long call helps lower the risk of stock losses in such situations.

How A Synthetic Long Call Works

A synthetic long call protects investors against losses if a stock should go down instead of up.

For example, suppose you own stock in a corporation, called Hot But Volatile [ticker symbol: HBV].

If you simply own shares of HBV (but have no options positions on it), you make money when the share price rises. However, if the share price goes down you lose money.

To limit your risk of losses, you may consider a synthetic long call which can be constructed by buying put options for HBV.

When HBV share price falls, the put options rise in value, thus covering a good chunk of the losses from the stock going in the wrong direction.

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Synthetic Long Call Max Profit Potential

The synthetic long call has nearly unlimited profit potential just as a traditional long call does.

There is no theoretical ceiling on the stock’s appreciation, however, you will make less money if the stock goes up than you would had you purchased the stock alone.

That’s because when you purchase a put option, your profit is reduced by the cost of the put option, so your stock’s value must rise above the price of the put option before you can begin to turn a profit.

Commonly, investors purchase at-the-money put options as part of this strategy.

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Why Trade Synthetic Long Calls

The major benefit of the synthetic long call is that the put options cap any losses should the stock go down in price instead of up.

If the stock goes down, losses are limited only to the total cost of the shares plus the put options minus the put strike price.

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How To Get Started Trading Synthetic Calls

The first step to creating a synthetic long call is to purchase shares of stock in a company using a reputable broker.

At the same time as you purchase these shares, place an order to buy an at-the-money (ATM) put option on the same stock.

This means that you purchase a put option at the stock’s current value. For example, if the stock is worth $75, buy a put option at strike $75 also.

The rule of thumb is for every 100 shares of stock you own, buy 1 long call put contract.

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When Not To Trade A Synthetic Long Call

A synthetic long call is not appropriate to use in all situations.

Despite the potential for profit, synthetic long calls are not so much to make profits as they are designed to preserve capital.

In other words, the synthetic long call is like an insurance policy against a stock dropping in price more so than it is a vehicle to earn profits on a stock.

Nevertheless if the stock rises, you may actually make more money from the share price increases than you lose from the put option losses.

In general, you want to use a synthetic long call if you are worried about short-term losses in a stock you plan to hold onto for a while.

Or if you are new to investing, you might want to use synthetic long calls to help limit your losses while you are learning how to invest effectively.

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What Is The Risk In Trading A Synthetic Long Call?

Risks are limited when using a synthetic long call, but they are not non-existent.

If the stock goes up in value instead of down, the cost of put options could cut into your profits. However, using a synthetic long call help to mitigate the risk of loss because your losses will be limited if the stock goes down in price.

Another risk is that the share price never returns back from its dip lower. The idea behind the synthetic long call is to protect your shares when they are falling, and sell the put for a profit when the share price has bottomed out.

If you were to sell your put options and subsequently the share price continues to falling you could experience higher losses than had you simply placed a limit order to sell your stock when the share price first started to fall.

Or if you hold on to both your shares and the put options, but the share price never recovers your loss will equal the maximum risk in the trade, which is the total cost of the shares plus the cost of the put(s) minus the strike price of the put(s).

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How Does Time Decay Effect A Synthetic Long Call?

The put option you purchase is a long option and all long options suffer from a factor called time-decay. So over time, the premium in the put option will depreciate.

All else being equal, the put option will steadily lose value until all its time-value is gone.

If the share price remains above the put option strike price at expiration, the put option will expire worthless and you will lose 100% of the price you paid for the put.

On the other hand if the share price is below the put strike price when expiration comes around, the put will be automatically exercised and your shares will be sold at the put strike price, resulting in a loss equal to the maximum risk in the trade.

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What Is The Breakeven Point Of A Synthetic Long Call?

The breakeven point is the point at which you are neither making nor losing money from your synthetic long call.

This doesn’t mean it’s time to sell!

The stock will change in value; if it goes down, you’ll make money off the put option and if it goes up you’ll make money off the stock itself. So don’t give up when you hit the breakeven point.

For example, if the share price is $100 and you paid $5 for the put option, the theoretical breakeven at expiration of the option is $105.

Another way of thinking about this is that the share price would have to rise to $105 in order for you to not lose money by expiration.

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The article What Is A Synthetic Long Call? was originally posted on Investormint