May_27_Bloga_Cover_Order_2

Cover Orders – Overview

Introduction

Recently, we had enabled trading for a special order type called Cover Orders back in January. Today, we are enabling Cover Orders for Options (sell side only) also. Cover orders is a multiple-leg order involving a regular market order and a stop-loss market order. When you place a cover order in this fashion, your margin is reduced significantly than what would normally be charged. We will go into the details below.

Cover Order Types

The following order pairs are considered valid cover orders. Cover Orders only apply when both orders are tied to the same trading symbol. Here are valid ways to construct a cover order:

  1. Buy Market Order + Sell Stop Loss Market Order
  2. Sell Market Order + Buy Stop Loss Market Order

Cover orders are now active for the following segments — Cash, Futures, Options (sell side only), Currencies. Cover orders are not allowed on MCX Commodities because it’s not permitted by the exchange.

Margin Benefits

Without the cover order functionality, your margin requirements would be as follows:

Scenario: You sell 1 Nifty Option CE 6,100 at Rs. 72 and place a stop loss for the same order at Rs. 80.

Without cover orders, your margin requirement would be the requirement for 1 Nifty Option CE 6,100. The stop loss order takes up no extra margin nor does it reduce your requirement. In today’s rates, it would be approximately, Rs. 23,000.

With cover orders, your margin requirement would be the price difference of the stop loss and the short position (Rs. 80 – Rs. 72 = Rs. 8) multiplied by the quantity (1 lot of Nifty = 50 shares). Hence, it would be Rs. 8 * 50 = Rs. 400. Along with this, there is a safety factor applied to this number. At RKSV, we use 1.5 as the margin safety factor. This would come to Rs. 400 * 1.5 = Rs. 600. There is also a minimum margin requirement of 2.55% of total traded value. The minimum margin requirement comes to (Rs. 6,100 + Rs. 72) * 50 * 2.55% = Rs. 7,870. So your applicable margin requirement would be the higher of Rs. 600 and Rs. 7,870. Hence, it is Rs. 7,870.

That represents a savings of over 75% when compared to traditional margin requirements. For the same amount of money, you can trade almost 3 lots of Nifty options for the price of 1, when you apply a stop loss to it.

Placing a Cover Order on NEST

Cover Orders are available on both the web trading platform and the desktop trading platform.

Desktop Trading Platform – RKSV NEST

To place a buy cover order, press Shift+F1 on the main screen.
Buy Cover Orders at RKSV NESTTo place a sell cover order, press Shift+F2 on the main screen.
Buy Cover Order at RKSV NEST

  • The bottom left portion of the window shows the range in which the trigger price can be in
  • The perc max shows the percentage value of the range
  • The trigger price is the price of the stop loss market order you want to use

Web Trading Platform

  1. On the main menu, select Trade
  2. Click Market Watch
  3. At the order placement window the bottom, select your segment, ticker and select CO as the product code
    RKSV NEST - Cover Order
  4. A new field called Trigger Price will appear on the bottom right. This is the price of the stop loss market order
Shrinivas Viswanath

Shrinivas Viswanath

Shrinivas enjoys working on web and desktop technology. Developing products that enhance user experience and emphasize simplicity are his passion. While he's not busy fixing code, he's usually listening to music, running or watching movies.

  • prafulchandra parmar

    Thanks for introducing cover orders in option.

    Are option cover orders for intraday only or they can be carried til expiry..?

    • Shrinivas Viswanath

      Hi Prafulchandra,

      Thanks — they are only available Intraday.

  • Mohammad Arif

    How much margin is require for cover order stated below
    Bank Nifty one lot of strike price Rs.11000.00
    1-Buy Market Order Rs 135.00 + Sell Stop Loss Market Order ( say -20%)
    2-Sell Market Order + Buy Stop Loss Market Order ( say +20%)
    and vice versa i.e.
    1-Sell Market Order Rs 135.00 + Sell Stop Loss Market Order ( say +20%)
    2-Sell Market Order + Buy Stop Loss Market Order. ( say -20%)
    and how the trading will happen.
    As I have never use cover order, so please clearly explain the mechanism .

    • Vaibhav Vora

      Hi Arif,

      Buying options in a cover order product type is not allowed by us.
      Selling options in case of your example would be as below
      Sell Option @ 135
      Stop-loss of up to 162 is allowed (20% range of 135)
      Margin would be higher of

      a) (11,000+135)*25*1.7%*1.5 = 7,098.50
      b) (162-135)*25*1.5 = 1,012.50

      Thus margin applicable would be 7,098.50

  • SANJAY KUMBHAR

    Respected sir,
    Suppose i want to buy stock option in voltas 125 PE at Rs 4.00
    and sell at Rs 6.00 with stop loss of Rs 2.00 .How would i use this cover order

    • Vaibhav Vora

      Hi Sanjay,

      A cover order is placed with a stop-loss order only and not with a square off order.
      Your description is a bracket order which will be released soon.

  • AMIT

    I want do intraday, even I have an account in RKSV, but is there any facility to carry out order such as buy, SL, Target Sell , if SL is hit then Target sell should be automatically cancelled and if Target is achieved SL order should be automatically cancelled.If it is there please let meknow, because it is an essential instrument to place an intraday order and forget for the rest of the day.

    • Shrinivas Viswanath

      Hi Amit,

      What you’re describing is a bracket order, not a cover order. We will release that soon.

  • Nitesh Kumar

    Sir,

    Do we have this cover order for stocks also, or is it there only for index

  • Joseph PD

    Sir,

    Please do the need full to introduce bracket order at the earliest which will help us to trade tension free.

    • Vaibhav Vora

      Hi Joseph,

      We are working on it and will release that soon.

  • manju

    Right now, 8400ce costs 5430 and 85ce costs 5459 at around 1045am.
    So if one shorts84ce at 117.85 and squares off at 76.05(Day close), hell make rs 1045. But shorting 85ce at 63.2 at 1045am and squaring off at day close of 37.55 gives a profit of 641.25.

    So whys that much difference?

    • Dear Manju,

      Since 8400 CE is more in the money compared to 8500 CE, it will tend to loss more Intrinsic and Time Value every time Market falls.

      Thanks

      • manju

        in that case is it obviously a better one to short intraday. Also confirm if my above calculations with margin is right.

        • Dear Manju,

          It totally depends on you.

          While selling, margins will be high, you calculated based on the premium, which is wrong. Please use this tool for calculating the margins http://rksv.in/trading/tools/span-calculator/

          Yes margins are also available for other option instruments. Leverage vary with the pricing plans.

          Thanks

          • manju

            the calculator is not for cover orders!

          • Dear Manju,

            Yes you are correct, but we provide 4x for cover orders. So you need to divide the calculator output by 4 in order to get the cover order margin.

            Thanks

          • vishal

            sir how much maximum sl required for writing nifty option in cover order ( means 20% or 25 %) and at what time it should be covered ( 3:15pm or 3:20 pm)