What is a One-Cancels-the-Other Order (OCO)
A one-cancels-the-other (OCO) order is a pair of conditional orders designed such that if one order executes, the other is automatically canceled. An OCO order typically combines a stop order with a limit order on an automated trading platform. When either the stop or limit price is triggered, the respective order is executed, and the other order is automatically nullified. Savvy traders utilize OCO orders to manage risk and strategically enter the market.
OCO orders differ from order-sends-order (OSO) conditions, which trigger a second order instead of canceling it.
Key Takeaways
- One-cancels-the-other (OCO) is a conditional order comprising a pair of orders where executing one automatically cancels the other.
- Traders typically deploy OCO orders for highly variable stocks with wide price ranges.
- Certain trading platforms allow for the placement of multiple conditional orders, canceling the remaining orders when one is executed.
Basics of a One-Cancels-the-Other Order
Traders harness OCO orders to navigate retracements and breakouts. Suppose a trader wants to capitalize on a price break above resistance or below support—they could place an OCO order using a buy stop and a sell stop to enter the market.
For instance, if a stock trades within a range of $20 to $22, a trader could set an OCO order with a buy stop just above $22 and a sell stop just below $20. When the price breaks past the resistance at $22 or drops below the support at $20, a trade will be executed, and the corresponding stop order will be canceled. Conversely, a trader adopting a retracement strategy might place an OCO order with a buy limit at $20 (support) and a sell limit at $22 (resistance).
When using OCO orders to enter the market, the trader must manually set a stop-loss order once the trade is executed. The time in force for OCO orders should synchronize, ensuring that both the stop and limit order executions occur within the same timeframe.
Enhanced Example of an OCO Order
Imagine an investor owns 1,000 shares of a highly volatile stock currently trading at $10. Assuming they foresee the stock trading over a wide range in the short term and set a target of $13, they also want to limit their possible losses to no more than $2 per share. The investor could place an OCO order consisting of a stop-loss order to sell 1,000 shares at $8 and a simultaneous limit order to sell the same shares at $13, triggered by whichever condition is met first. These orders could be designated as day orders or good-’til-canceled orders.
If the stock’s price rises to $13, the limit order to sell will activate, and the investor’s 1,000 shares will be sold at $13. Concurrently, the platform automatically cancels the $8 stop-loss order. Had the investor not connected these orders via an OCO, they could potentially forget to cancel the stop-loss order—a scenario which might unintentionally initiate a short position of 1,000 shares if the stock later dips to $8.
Related Terms: Order-Sends-Order (OSO), Stop Order, Limit Order, Time in Force, Retracement, Breakouts, Support, Resistance.
References
- U.S. Securities and Exchange Commission. “Rule 6 Options Trading Rules Principally Applicable to Trading of Option Contracts”, Page 20
