Opening the position
On 6 August 2008, Neptune Orient Lines is trading at $2.77/2.78. You decide to buy 6000 shares as a CFD at $2.78, the offer price, on a Limited Risk basis.
You place your Guaranteed Stop at $2.51. This means that, if the share price drops sharply, your exit price will be guaranteed at $2.51. So the most you can lose on the position (excluding transaction costs) is $1620 ($2.78, the opening level, minus $2.51, the stop level = $0.27: $0.27 x 6000 shares = $1620).
The standard commission on the transaction is 0.1%, or $15 minimum commission. The Limited Risk premium is also charged when the position is opened. In this case it is 0.3% or $50, and your standard commission is $16.68.
Triggering the Guaranteed Stop
A few days later, Neptune Orient Lines opens markedly lower at $2.46.Your Guaranteed Stop is triggered and your position is closed at $2.51, even though the market never traded there.
You sell 6000 shares at $2.51. On the close, you only pay the standard commission on the transaction, in this case $15.06. Your gross loss on the trade is calculated as follows:
Gross loss on trade
| Opening level | $2.78 |
| Closing level | $2.51 |
| Difference | $0.27 |
Gross loss on trade: $0.27 x 6000 = $1620 (excluding costs)
Without the Guaranteed Stop, you would have been lucky in this example to close your position at $2.46, representing a gross loss on the position of $1920.
To calculate the net result of the transaction you also have to take into account the commission and Limited Risk premium you have paid and the interest and dividend adjustments. These are applied to Limited Risk positions in exactly the same way as to standard CFD positions (see Detailed CFD Example).