Capture Profits and Control Risk with an OCO Order!

This post shows how Money in Ligtbulb - OCO Order to place an OCO Order in the Think or Swim platform. An OCO order stands for One Cancels Other. OCO orders are a great trading technique for people looking to capture profit and be protected at the same time.

The basics of an OCO order is that you purchase an option, stock, or ETF and you place a stop order and limit order forming a bracket around your position. Whichever side of the bracket gets hit first will close your trade and cancel the other order. This is a great technique for night time traders who want to place an order for the following morning and then have a stop and limit order placed at the same time automatically.

In this video, I go over how to place the OCO order at the same time as the purchase of an option. If you have any questions about how to place an OCO order, please comment on the post.

ThinkOrSwim OCO Order Tutorial – Video Transcription:

Hello. This video is going to cover how to place an OCO bracket order on an option trade. And I’m going to show you how to place this order based on a percentage of the price that you’re paying for and also how to do it while you place the order for the actual option.

What is an OCO Order?

An OCO Order is a One-Cancels-Other order. What that means is, when you place this order, you’re placing two orders essentially: a limit order and a stop order. Whichever one gets filled first, it will cancel the other one automatically. And what that does is it’s great for people who only trade at night and have day jobs. You can place a stop order and a limit order, so if you hit your target, you’d capture profit and you’re out. Or if you hit your stop, you’re also out and it will cancel the limit order.

OCO Order Example

We’re going to do this trade on the S&P 500, the SPY. I’m definitely not recommending this trade. I’m just using this as an example. So we are going to the trade tab. In our Market Timing Service, we typically go with a 70% delta in the money option. Let’s just go ahead and do that now. And typically, when you go to buy the option, you would do what I just did. You would just left-click and just hit “Buy.”

To do the OCO bracket though, while you order it, you would right-click and choose “Buy Custom” and then choose “With OCO Bracket.” And what that’s going to do is bring up three orders. You’re going to have your order for the put; you’re going to have your order for the limit order; and you’re going to have a stop order. And then, now you have to set these parameters to what you want.

So that we get filled right away, I’m going to change this to a market order so that we’re filled automatically with the 125 put that we’re buying. In the Market Timing Service, we would typically go with a 60% limit. So if we make 60% in profit, we would close out the trade. And then, also a 30% stop. If we lost 30%, we would close out the trade.

For the demo, we’re just going to do a 1% gain and 1% loss so that we get stopped out. We want to get stopped out or limited out right away so that we could see how this works from start to finish. Instead of MANUAL, we’re going to change it to TRIGGER for both of them. And we’re going to click on the little box until you see percentage. And like I said, you can change this to whatever percentages you want. In the MTS, we use 60% and 30%. But here, we’re going to stick to the 1% so that we get stopped out.

Also, we’re going to just do a day order for now. But if you want this order to maintain for a couple of days, you would have to choose this to GTC (Good til Cancel), which we can do now.

So, that’s it. We have our order. We have our limit order set, our stop order set. Let’s go ahead and confirm and send. You can see that’s three orders there. It should get filled pretty quick. There we go.

Now, let’s switch over to the Monitor tab. Up in the Working Orders, you can see we have our stop order here and our limit order. This is the current price, which is $8.50. And down here, we paid $8.50, so we’re pretty much even still. So now, what we’re waiting for is either for this to gain in price up to $8.59 and then this will trigger an order to try and sell it at $8.59, or a loss down to $8.42.

This may take a minute. I’m going to pause the video until this fills. When we come back, we’ll examine the trade. And after we’re closed out, we’ll examine how it canceled the other order.

All right. So we got filled. Let’s see what happened. We’re going to look in our little message center to see where we got filled at. You can see we bought the SPY October 125 put for $8.50. This is saying that that order was filled. The next line is we sold it for $8.59. We hit our limit order, which was 1% higher, so we captured some profit. And then, I canceled the stop order, which was at $8.42. This is saying that our limit order got hit.

So, that’s the basics of this. This can be used on stocks and ETFs. You can base it off percentages like we did, or you can base it on actual dollar amounts that you’re looking at. Hopefully this helps. If you have any questions about placing an OCO order, just let us know.

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Comments

Chris says:

September 14, 2011 at 9:24 pm

I like the idea of setting up your trade rules from the start. This will help take some of the emotion out of my trades. Great tip!

- The Assassin says:
  
  September 15, 2011 at 6:55 am
  
  Thanks. Like you said having this set up can make it easier to stick to your plan so you don’t have to “decide” to do it manually. When greed kicks in, taking profits it sometimes harder than getting out.
  
  Thanks Chris.