How to Use a Stop Limit Order to Cover a Short Position

I got this question the other day:

When you short a stock at 30.00 and you want to place a stop limit in case it jumps up past your max loss of say, 31.00, how exactly is that order entered (everytime I try to do this, it sells (Ed: he means buys) my stock immediately – I’m doing something really wrong). Do I put a limit price of 31.00 and a stop price above that, i.e. 31.50 (thus saying it’s ok to repurchase any shares between 31.00 and 31.50)?

This is one of the trickier orders to place. In that situation you would want to enter a buy stop limit order (buy on stop with a limit). The stop would be at 31.00 and the limit would be 31.50. Here’s a screen shot of a similar order to cover QQQQ with a buy stop @ 47 with a limit of 47.10:

What would happen here is that once the stop price of 47.00 is hit a buy limit order of 47.10 would be entered. As with any limit order, you’re guaranteed price but not execution, so you may not be filled. If you wanted to be sure that you got out (covered) just use a buy stop of $47.00.