Buy To Cover

The buy to cover order allows you to buy back stocks or options that you have shorted in order for you to fill your position.

When you short a stock you borrow shares of the stock and sell it on the open market. Your hope is that the stock will go lower in value and you will be able to buy it back at a lower price and return it to the broker.

You can hold short positions for as long as you like and once you exit it you buy back the stock in order to cover your short position and return the stock to your broker.

Normally you will not be forced out of a stock, but if the stock shoots up too fast there is always a risk that your broker will get worried and want the stock back while you can still pay for it. If some rare situation like this happens you may be forced to buy it back at whatever price it is currently trading at.

Buying Back Sold Option Contracts

It is often overlooked that you can place a buy to cover order on an option too. If you sell an option you collect the premium and are betting the stock will not get to a certain level. If the premium melts away to just a small percentage of what it once was you can buy the option back to cover your position.

With options you do not have to buy it back. You can let it expire worthless if you want. But if you do you are taking additional risk the longer you hold onto it.

Many traders who have sold options on stocks will find the options nearly worthless at the end of the month. If they still like the trade they may choose to buy back the options for a profit and sell the next months options. This little strategy is called http://www.stocks-simplified.com/rolling_options.html rolling options and it can be very effective.