What is a Cover Order?
A Cover Order is a special type of order through which the user can take an intraday position and take advantage of extra exposure while being protected through a Stop-Loss order.
The system will place two orders simultaneously: a Market Order and a corresponding Stop-Loss market order that will only get triggered at the specified Stop-Loss trigger price. If the trigger price is hit, the Stop-Loss order gets executed as a Market Order. The combination of both these orders being placed simultaneously is known as a Cover Order. Cover Orders help you limit any potential losses that could be incurred on a position.
Benefits of Cover Orders:
-Limited Risk and Maximum Profit: Due to the inherent way Cover Orders work, they help traders minimize downside risks and provide better control over risk management. Since there is always a Stop-Loss corresponding to each trade, Cover Orders can help users trade in a more disciplined manner. You can take advantage of the margin benefits as well, using the Cover Order facility to leverage their positions greatly while enjoying the benefits of a Stop-Loss to protect them from the downside risk. Overall, Cover Orders reduce downside risk but do not impose any limits on their returns. This is a win-win situation.
How Cover Orders Work:
-A Cover Order is basically a two-legged order. For this, you will need to place a buy/sell order with a compulsory corresponding Stop-Loss order in the opposite direction.
-The first entry order will always be a market order.
-The corresponding Stop-Loss order will sit in the order book as a Stop-Loss trigger pending order; once the trigger price hits the Stop-Loss limit price, it gets triggered as a market order.
-The trigger price range will be defined daily, and you must place the Stop-Loss order within the specified range. For example, suppose Reliance Industries is trading at Rs. 900, and the range is specified as 10%. In this case, you can specify the Stop-Loss order between the price range of Rs. 810 to Rs. 990 as the trigger price.
-Once the Cover Order has been placed and the first leg has been traded, you will not have the ability to cancel the Cover Order. You can only exit the current one-sided position.
-In the very rare case in which the first order is an open order pending at the Exchange and has not been traded, you can cancel the Cover Order.
-The Stop-Loss order can be modified within the stipulated price range. After the order has been modified, the margin will be recalculated.
Related articles
1. How to place a Cover Order (CO)?