What is a cover order?
A Cover Order is a special type of order through which the user can take an intra-day position and take advantage of extra exposure while being protected through a stop loss order.
The system will place two orders simultaneously: a market or limit order and a corresponding stop loss market order which would 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. Users 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 downside risk. Overall, Cover Orders reduce downside risk but do not impose any limits on their returns.
How Cover Orders Work
A Cover Order is basically a two legged order. The client needs to place a buy/sell order with compulsory corresponding stop loss order in the opposite direction.
The first entry order can be a market or a limit 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 the client 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 the client can specify the Stop Loss order between the price range of Rs. 810 to Rs. 990 as the trigger price.