What is a 'One-Cancels-the-Other Order - OCO'
A one-cancels-the-other order (OCO) is a pair of orders stipulating that if one order is executed, then the other order is automatically canceled. A one-cancels-the-other order (OCO) combines a stop order with a limit order on an automated trading platform. When either the stop or limit level is reached and the order executed, the other order will be automatically canceled. Seasoned traders use OCO orders to mitigate risk.
BREAKING DOWN 'One-Cancels-the-Other Order - OCO'
For example, assume an investor owns 1,000 shares of a volatile stock that is trading at $10. The investor expects this stock to trade in a wide range in the near term, and has a target of $13 on it; for risk mitigation, he would like to lose no more than $2 on the stock. The investor can therefore place an OCO order, which would consist of a stop-loss order to sell 1,000 shares at $8, and a simultaneous limit order to sell 1,000 shares at $13, whichever occurs first. These orders could either be day orders or good-till-canceled orders.
If the stock trades up to $13, the limit order to sell would be executed, and the investor's holding of 1,000 shares would be sold at $13. Concurrently, the $8 stop-loss order will be automatically canceled by the trading platform. If this order is not canceled and the stock subsequently drifts down to $8, the investor may needlessly find himself with a short position of 1,000 shares at $8 if the sale order was mistakenly executed.