What is a One-Cancels-the-Other Order (OCO)?
In trading, a one-cancels-the-other order is an instruction given when placing two orders simultaneously. If one part of an order on a security is executed, then the other part is canceled. Such an order is also referred to as an 'alternative order' or 'either-or' order.
How Does a One-Cancels-the-Other Order (OCO) Work?
OCO orders are often used in online trading as a way to link a stop loss order (used to cut a loss) with a limit order (used to capture a gain). Once a stock hits a stop loss price target, there is no need for the other order to take profit on the same stock, or vice versa.
For example, an investor owns shares of company XYZ, currently trading for $25 per share. He believes the shares are undervalued, and expects the price to climb another $20. To make sure he locks in the gain, the investor places a sell limit order for $45, the maximum price at which he wishes to hold the stock. He also places a trailing stop order for $10, which will sell the shares if it drops $10 from its current high. As the prices climb to $45, the investor's sell limit order is triggered, selling his shares, and cancelling his trailing stop.
Why Does a One-Cancels-the-Other Order (OCO) Matter?
OCO orders answer the need for quick action on the part of the investor to take advantage of rapid market movements. When investing online, for example, an investor can place two orders simultaneously and allow the broker to execute an action and cancel the second action without requiring a second communication from the investor, making the transaction more efficient.
This kind of order allows for investors to effectively hedge in the option market. It is beneficial for those not wanting to track their investment's value every day, but wishing to buy or sell under certain conditions.