What Is a Contingent Order?
A contingent order is an order that is linked to, and requires, the execution of another event. The contingent order becomes live, or is executed, when the event occurs. An example is a stop loss order. The stop loss to sell is contingent upon a security first being bought.
A contingent order is also known as a conditional order.
- A contingent order is one that relies on a specific event to occur.
- Orders can be contingent on each other, such as when two or more orders need to be executed at the same time.
- Orders can be contingent on another order or event, such as when a stop loss is automatically sent out once a trade has been entered.
Understanding the Contingent Order
Continent orders are contingent on something else happening before the contingent order is processed.
A contingent order can be:
- An order involving the simultaneous execution of two or more transactions.
- An order where the execution depends upon the execution of another order.
- An order where the execution depends on specific criteria, such as price, volume, time, or other factors being met.
In a simultaneous transaction, the orders are contingent on each other, as all the orders need to be processed at the same time. If they can't be processed at the same time, the orders remain pending until they can be executed at the same time.
A contingent order could also be based on another order or event. For example, a trader may make an options buy order contingent on being filled on a stock buy order. Only once they own the stock should the options order be executed. The trader could also request the orders are executed simultaneously.
Criteria an order is contingent upon could also include volume, price, time, or a host of other fundamental or technical tools. For example, an order may be contingent upon a security reaching a certain price, having a certain amount of volume, and achieving both of these within certain hours of the day.
Contingent Order Uses
Contingent orders are useful because they allow a trader to implement a strategy, or multiple positions, once the initial event occurs. If a trader had to post each transaction in sequential order, it may leave them vulnerable to losses or changes in price. For example, assume a trader wants to buy a stock at $50, but they also want to place a stop loss at $49.85, and a sell order (target) at $50.30 as soon they own the stock. This is called a bracketed order.
They could do this manually, but if the stock price moves very quickly they may not get their orders out in time. If the stop loss and target are sent out contingent on the buy order being filled, the trader knows that whether the stock moves up or down they have orders out to capture profit and control risk.
Also, there is another problem with doing it manually. If you buy a stock and try to place a sell order above the price and below the price (target and stop loss), the software probably won't let you do it. This is because the trading platform thinks you are trying to sell twice. But, if the stop loss and target are contingent upon the initial position, it knows that if the stop loss or target is reached, that order closes the position and the other order can be canceled because the initial position no longer exists. The software knows you are not trying to sell twice, and so it will let you put out both orders at the same time. One of the contingent orders will be canceled if the other contingent order is filled, in this case.
Most brokers offer contingent order functionality. This may come through various order types, such as basket orders, multi-leg option orders, or bracket orders. The trader inputs what they want to happen first, and then sets the parameters for the contingent order(s). On a bracket order (which creates contingent orders) that would mean placing the initial order. Then the stop loss and target are set. The stop loss and target orders are only deployed if the initial order is executed.
Contingent Order Example in the Options Market
Contingent orders are commonly used in the options market, since some options trades have multiple legs.
For example, a buy-write strategy involves the simultaneous purchase of a long stock position and the writing of a call option against that position. A trader may place a buy order for the long stock position that's contingent on the call option being written at a certain price, or vice versa.
Without a contingent order, traders would have to execute two separate transactions. If the price changed between the two orders, the trader could experience a moment of elevated risk or potentially a worse (or better) price than expected on one of the transactions. The contingent order makes sure that the position is opened exactly as the trader expects.