How does a stop limit order function?

A stop limit order is a specific type of order that combines the features of both a stop order and a limit order. It works by first setting a stop price, which, once reached, triggers the order. After the stop price is activated, the order becomes a limit order at a specified limit price. This means that the execution of the trade will only occur at the limit price or better.

This unique mechanism allows traders to have a degree of control over the price at which their orders are filled, rather than having their orders executed at potentially unfavorable market prices. If the market is moving quickly, a stop limit order may not be filled if the limit price is not met.

Given these dynamics, the correct answer accurately captures how a stop limit order functions, detailing both the activation of the order at the stop price and its subsequent execution at the limit price.