How Stock Traders Use a Bracketed Sell Order

A bracketed sell order is a strategy of placing three simultaneous orders to take a short position on a particular security. The three components of a bracketed sell order include: (1) an initial short position (2) a buy stop order and (3) a buy limit order. Under this strategy, the investor seeks downside protection while potentially locking in a profit without having to continuously monitor stock price changes.

As an example, an investor starts by taking a short position on a particular stock and then enters a sell order at $20 followed by a buy order at $25. Depending on the direction the stock price takes, the investor will see a profit of $5 or, at worst, a loss of $5. Many investors utilize a bracketed sell order strategy to minimize the uncertainty associated with their trading results and protect against an unexpected short squeeze.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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