Jim Woods

Learning Options Lingo: Contingent Orders

by Jim Woods   08/24/09

O.C.O. -- Order Cancels Order

It depends on your brokerage firm whether you're allowed to place O.C.O. orders, but the ability to execute this kind of contingent order is getting more and more common.

An O.C.O. is the ability to place two orders at the same time. For example, let's say you own an XYZ May 40 Calls at $3.40, then you place an O.C.O. order that allows you to place a stop loss at, say, $1.50, while simultaneously placing a second limit order to sell XYZ May 40 Calls at a price of, say, $7.

If the XYZ May 40 Calls happen to zoom up and fill (sell) at $7 that particular order would cancel the other (the other order being the "stop order" you had in place to sell the XYZ May 40 Calls for $1.50. One cancels the other (i.e., one Order Cancels another Order, or O.C.O.) Conversely, if you were to be stopped out of the trade at $1.50, the order to sell out at $7 would be immediately cancelled.

O.T.O. -- One Triggers the Other

O.T.O. orders (One Triggers the Other) involve two different trades that are based on each other. When trading, you could find yourself in a situation where you'd like the "fill" (or a completed trade) to signal the triggering of yet another trade. Here's a hypothetical example of how an O.T.O. contingent order works.

A trendy clothing retailer seems to steam ahead in the quarter leading up to the back-to-school shopping season. You decide to pick out hypothetical retailer "ABC Clothing," and you determine that you want to buy in at around $29. Currently the stock is trading for $29.70 and we're in February. So you enter in a limit order to buy the Apr 30 Calls when the stock hits $29.

Then, as part of this O.T.O., you specify that if your buy order gets filled, it will immediately trigger an order to sell your Oct 30 Call options when ABC Clothing stock hits $34 per share (based on some past years of evaluation of what tends to happen to the stock during this time). Your buy order (when filled) "triggered" another order. In our hypothetical ABC Clothing example, it was an order to sell when a certain price was reached.

Contingent orders can be a great way to follow up on a specific set of market conditions. When used correctly, contingent orders can be an excellent tool for helping you maximize your options trading profits.

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Jim Woods is a Senior Editor for OptionsZone.com. To learn more about him, read his bio here.