Definition
The term One-Cancels-the-Other refers to instructions sent to a broker that consist of two active orders; if either is executed, the second is automatically inactivated. One-Cancels-the-Other orders are oftentimes used by traders to mitigate risk in a volatile market.
Explanation
One-Cancels-the-Other (OCO) orders are one of several types of contingent orders, which consist of two or more sets of instructions. When an OCO order is place, both orders are active. If one of the orders executes, then the remaining order is automatically canceled, or inactivated.
Typically, investors will use OCO orders to mitigate risk in a fast moving, or volatile, stock market. When placed, the Time-in-Force duration must be exactly the same. The most common pairing of OCO orders is a stop-loss order to sell a stock, and a limit order to sell the same securities. By creating this band around the selling price of a stock, the investor is able to sell shares to lock in a big profit or prevent a large loss.
Example
An investor owns 500 shares of Company XYZ, which is currently selling at $20.00 per share. Recent economic news has increased the volatility of the stock market, including the price per share for Company XYZ. In order to mitigate this risk, the investor places an OCO order, which consists of a limit order to sell the 500 shares of Company XYZ at $24.00, and a stop-loss order to sell the same shares at $16.00. The investor also combines the order with Time-in-Force instructions that specify the OCO is Good-Til-Canceled.
Related Terms
All-or-None, Fill-or-Kill, Good-Til-Canceled, Immediate-or-Cancel, National Best Offer, National Best Bid, market order, limit order, day order, One-Triggers-the-Other, One-Cancels-All, Good-Til-Date, At-the-Opening, Market-on Open, Market-on-Close, At-the-Close, Market-if-Touched, Trailing If-Touched