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Cover Order Explained

Cover Order Explained

Traders that usually trade with high leverage often use Cover Orders to control risk and protect themselves from potential losses.

Really? There are ways to cut losses and minimize risk?.. YES!

Does a Cover Order help in any way?.. YES!

Okay, How?.. Well, let’s find out.

 

What is a Cover Order?

A Cover Order is an advance intraday order that is accompanied by a compulsory Stop Loss Order. This helps traders minimize their losses by safeguarding themselves from unexpected market movements. A Cover Order offers high leverage and is available in Equity Cash, Equity F&O, Commodity F&O and Currency F&O segments. It has 2 orders embedded in itself, they are

  • Limit/Market Order
  • Stop Loss Order

 

How does a Cover Order work?

A Cover Order can be placed either as a Market or a Limit Order. Although a Market Order executes the order at the current market price, a Limit Order is executed only when the price of the share hits the desired entry price. Let’s look at a few scenarios to understand this better.

Scenario 1: Limit Order not executed

In Cover Order, If the Limit Order does not get executed before market closing, the system will automatically cancel your trade by 3:15 pm, since Cover Orders are intraday orders.

Scenario 2: Limit Order executed, Stop-Loss not executed

When the Limit Order is executed, the Stop Loss Order gets activated, but if the price of the share does not hit the stop loss level before market closing, the system will automatically square off your position at the current market price of 3:15 pm. This happens because Cover Orders are intraday orders, and all pending intraday orders get squared off before market closing at 3:15 pm.

Scenario 3: Limit Order executed, Stop-Loss executed

When the Limit Order is executed, the Stop Loss order gets activated. Now if the price of the share hits the Stop Loss price, your position will automatically be squared and you will book losses.

 

Cover Orders can be Buy (Long) or Sell (Short) orders

Buy and Sell Cover Order

If our budding trader is looking to buy ITC at Rs.1000, he/she is going long on ITC, and hence places a Long Cover Order. In other words, our trader wishes to buy low and sell high. So naturally the stop loss price here will be lower than the entry price, hence our trader places a Stop Loss Order at around Rs.900.

If our budding trader is looking to sell ITC at Rs.1000, he/she is going short on ITC, and hence places a Short Cover Order. Here, our trader wishes to sell high and buy low. The stop-loss price will be higher than the entry price since our trader is expecting a depreciation in price and hence places a Stop Loss Order at say Rs.1100.

 

Uses and features of Cover Orders

  • Controlled Losses - Cover Orders can literally be a life-saver for a lot of traders. A trader that places an order without a stop loss is at the risk of losing a substantial portion of his/her capital. Since a Cover Order accompanies a compulsory stop loss order, you are less likely to lose track of your losses and while also controlling them.
  • Higher Leverage - Since the compulsory Stop Loss feature reduces risk to a great extent, the leverage offered on Cover Orders is much higher when compared to naked intraday orders. Tradejini offers upto 30 times of contract value as leverage for Equity cash, and 5 times of exchange specified margin as leverage for all F&O segments.

 

Margin Calculation for Cover Orders

Since Cover Order positions generally carry lower margin requirement when compared to a normal order, the required margin will depend on the Stop Loss price entered. As a rule of thumb, lower margin for lower stop loss, while higher margin for higher stop loss.

Index Price Quantity Contract value Exchange Specified Margin Stop Loss Price Margin Required
Nifty 11560 75 8,67,000 69,550 11,510 12,720
Nifty 11560 75 8,67,000 69,550 11,485 14,959

Note: TradeJini offers up to 5x margin of the exchange provided margin for intraday orders. If a trader wants to carry the trade to the next day, he must fulfill the exchange provided margin.

 

How to Place a Cover Order

Option 1 - From the Menu Bar

Open Nest Trader → select “Order and Trades” tab → select “Cover Order” → select either (Buy / Sell) order → enter details → click “Submit”.

Option 2 - Using Shortcut Keys

Open Nest Trader → select “Script” from market watch

  • Press the shortcut key “SHIFT + F1” for a buy Cover Order → enter details → click “Submit”.
  • Press the shortcut key “SHIFT + F2” for a sell Cover Order → enter details → click “Submit”.

There are two ways you can set your target and stop loss using Cover Order. You can either enter absolute values or, you can also use ticks. 1 Tick = 5 paise, so 20 ticks represents 5 x 20 = Rs.1.

 

Modifying and Exiting a Cover Order

Until the Cover Order is executed (Limit/Market Order being executed), you can modify both, Limit Order and the Stop Loss Order. But once the Cover Order is executed, only the Stop Loss Order can be modified. You can modify the Stop Loss Order provided you meet the margin requirements (since margin required varies with stop loss levels).

If you wish to exit a Cover Order, the system will first convert this order to a buy/sell order and square off the order at current market price automatically.

To Modify or exit a Cover Order, you can use either the shortcut key (F3) to open Order Book or click on “View Orders and Trades” button on the menu bar → Select “Order Book”.

 

Still doubtful about how to place a Cover Order? Watch the video below.

 

Noteworthy Points about Cover Orders

  • All Cover Orders are Intraday orders by default, these orders will be squared off automatically at
    • 3:15 pm for NSE Equity & NSE F&O
    • 4:45 pm for NSE Currency
    • 11:30pm for MCX Commodity segment
  • Cover Orders can be placed only during regular market hours and can be placed during the pre-market trades (9:00 am - 9:15 am) only for Equity Cash and post-market trades (3:40 pm - 4:00 pm) Equity Cash and F&O.
  • Cover Orders are currently valid only for derivative based scripts in Equity Cash.

8 Comments

  1. It would be great if you can explain with an example for both buy and sell cover order – with a focus on managing risk

    Reply
    • Suppose Nifty is trading at Rs. 9800

      Long Cover Order: You decide to go long since you’re bullish on the market (Benefit from upward movement in prices) and place a market order to buy at Rs 9800 and also place a stop-loss sell order at Rs.8975 to protect yourself from any unexpected downward movement in prices.

      Short Cover Order: You decide to go short since you’re bearish on the market (Benefit from downward movement in prices) and place a market order to sell at Rs 9800 and also place a stop-loss buy order at Rs.9825 to protect yourself from any unexpected upward movement in prices.

      A stop loss order is placed as a pending order which gets converts to a market order on breach of the specified price.

      Scenarios for Long & Put

      Scenario 1: You square off the order by placing a (market sell for long) / (market buy for short) order once the prices reaches your desired target.

      Scenario 2: If the order is not squared off by you then the order is automatically squared off at the end of the day based on the last traded price irrespective of profit or loss.

      Scenario 3: The Order get automatically squared off on breach of the stop loss price.

      Reply
  2. Can i modify 2 leg & 3 leg orders in cover & bracket order. Pls clarify.

    Reply
    • Cover Order is a 2 leg Order & Bracket Order is a 3 leg order. And Yes you can modify all legs of an order.

      Reply
  3. can i use cover order for curency future and option ???

    Reply
    • Yes you can use Cover Order for Currency Future and Option, In fact you can you use for any segment and any script.

      Reply
  4. WHEN I WANT TO EXIT CO WILL I BE ABLE TO SEE THE TRADED,ASKING,BUYING PRICES ON THE SAME PAGE.

    Reply
    • Yes, you will be able to do it from a single screen. In order to do so, please visit order book (F3) and click F6 for snap quote.

      Reply

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