Knowledge Base

Cover Orders: How do they work and what are their benefits?


in Basics of trading
Tags: cover order

Cover Orders

A Cover Order is a special type of order that allows you to place a trade, get additional exposure and be protected with a stop loss order- all through one order. When you place a cover order, you are essentially placing “two trades in one”.

The advantage of a cover order is that it automatically protects you from having to experience a big loss by placing a stop loss simultaneously with your original order. Additionally, because you are using a cover order (versus having to place two separate trades), you get margin advantages as well.

How it Works

When you a place a cover order, the first leg is always a market order, while the second leg is always stop loss market order. That means, as soon as as you place your cover order trade, the first leg will get executed since it is a market order.

As soon as the trade has been executed, your stop loss will be a pending order sitting in the market. As soon as its price has been breached, it gets triggered and executed.

Let us go ahead and take an example.

Example: Tata Steel Cover Order

Let’s say that you have a strong feeling that Tata Steel, which is trading at 470/470.05, has the opportunity to reach 480. However, you don’t want to take more than a Rs. 10 loss.

This is a perfect situation for you to place a cover order.

You would place your buy cover order on Tata Steel, which should get executed at 470.05 (or perhaps slightly higher). You also specify your stop loss price. The stop loss price has to fall within a range, which is updated daily . In this case, let’s assume the range is 10%. That means that you cannot place a stop loss sell trade at a price lower than 423.

As soon as the buy order is executed, you have a few options. One is to simply wait until you wish to exit your position. Another is to modify the stop loss trigger price (using the 10% range example, it has fall within 10% of the last traded price).

What are the benefits?

As mentioned, cover orders allow you to essentially place a stop loss order with your regular order in one shot. You can think of it as a two-legged order. Additionally, you get margin benefits when using cover orders.  You can download our margin files at our Dropbox

Cover orders are available for Equities, Futures, Options, MCX Commodities and Currency Futures.

Where can I learn more?

We have written two blogs on cover orders where you can learn more detailed information, including how to place orders on our software NEST.

For an introduction to cover orders,
http://rksv.in/2014/01/introduction-cover-orders/

For information relating to cover orders on options,
http://rksv.in/2014/02/cover-orders-for-options/

 

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