Practice Quiz

FINRA Series 6

Category - Series 6

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Mr. A. D. Venturer owns 10,000 shares of Risky Corporation, which is currently selling for $8 a share. He is leaving shortly for an extended trip to Antarctica and will be out of communication for that time. He doesn’t want to liquidate his investment in Risky before he goes, but he doesn’t want to return to find that his $80,000 investment is worth little to nothing. Which of the following options would make sense for Mr. Venturer?
  1. buy a call option on Risky stock with an $8 strike price and an expiration date that occurs after his return
  2. place a stop sell order at a price less than $8 a share-perhaps $6 or $7 a share
  3. place a limit order to sell Risky at either $8 a share or a price slightly less than $8 a share
  4. enter a good 'til cancelled (GTC) market order to sell Risky
Explanation
Answer: B - The option that makes sense for Mr. Venturer is to place a stop sell order at a price less than Risky’s current market price of $8. A stop loss order becomes a market order when the specified price is reached. If he were to place it for Risky’s current market price of $8, his shares would be sold immediately at the next available price. If the specified price is less than $8, the order won’t get executed unless the price falls to that level. A limit order specifies the lowest price at which he’s willing to sell the shares, so if he places a limit order for $8 or less, the order will be executed immediately at the current market price of $8. A call option would not help him-it would just enable him to buy additional shares for $8 a share. And there is no such thing as a good ‘til cancelled market order. A market order is executed immediately at whatever the prevailing price is at the moment.
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