What is a Bracketed Sell Order
A bracketed sell order is a short sell order that is accompanied (or "bracketed") by a conditional buy order above the entry price of the sell order and a buy limit order below the entry price of the sell order. As the three component orders are based on set prices, this type of order seeks to help cover some of the caveats of the short sell order while also locking in profits.
BREAKING DOWN Bracketed Sell Order
A bracketed sell order is a kind of conditional order. Conditional orders help investors to initiate trades with specified prices. Some conditional orders, like a bracketed order, can have multiple conditions.
A bracketed sell order is more complex than its counterpart the bracketed buy order. Both types of orders are based on the ability to specify a maximum range for gains and losses. A bracketed buy order is more simplified since it involves a buy limit order with a limit sell order above the buying price to guarantee a profit and a stop loss order below the buying price to manage losses.
Components of a Bracketed Sell Order
A bracketed sell order has three components:
1. Short sell order at specified price
2. Buy stop order above the entry price of the sell order
3. Buy limit order below the entry price
A bracketed sell order is slightly more complex than a bracketed buy order because it involves a short sell order which requires borrowing. In a bracketed sell order, the trader first determines a short sell price at which they wish to sell. They enter into a contract to sell short. They then bracket that order with a buy order at a specified price above the short sell price and a buy limit order at a specified price below the short sell price.
A bracketed sell order involves multiple components centered around the short sell order. A trader will enact the buy limit order at a lower price than the short sell order which allows them to lock in a profit and cover short sell costs. The buy stop order offers a conditional element that provides for a maximum loss.
Why Use a Bracketed Sell Order?
Bracketed sell orders include much higher risks than bracketed buy orders since they involve short selling at the median price which relies on margin borrowing. Margin borrowing allows a trader to enter a short sell contract with consent that they can borrow the stock from their broker. The bracketed orders around the short sell order can help the investor to set a specified range for maximum gains and losses.