There are two parts to a position taken in a cover order. One is the first leg of the order that is the market order, that helps you to take the position and the second one is placement of SLTP and the limit price, which helps you safeguard your position..
For example: ‘Mr. Z’ buys HDFCBANK at Rs 825 in expectation that the price will rise. However, in the event of a fall in price, ‘Mr Z’ would like to limit his losses, so he opts for placing a cover order. ‘Mr. Z’ may place a limit sell order specifying a STLP of Rs 810 and a limit price of Rs 800. The stop loss trigger price has to be between the limit price and the last traded price at the time of placing the stop loss order. Once the last traded price touches or crosses Rs 810, the order gets converted into a limit sell order at Rs 800.
How does it work?
- The cover order entry point will always be a market order.
- Then you enter a corresponding SLTP and limit price.
- The trigger price range is defined daily and the client must place the stop loss order within that range. For example, HDFC BANK 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.
- Once the cover order has been placed and the first leg has been traded, the client cannot cancel the order. But, yes the client is allowed to modify his/her order.