What is a Contingent Order
A contingent order is an order that involves the simultaneous execution of two or more transactions, or the price or execution of another security. These order types may be helpful when placing two trades at the same time or when defining stop-loss points.
Also, known as conditional orders.
BREAKING DOWN Contingent Order
A contingent order can be either:
- An order involving the simultaneous execution of two or more transactions.
- An order whose execution depends upon the execution and/or price of another security.
These types of orders are generally placed for option strategies where two separate transactions must occur at the same time, but they may also be well suited for placing stop-loss points, since they don't appear in the order book. This is especially helpful for options traders where a market may be thinly traded.
Contingent orders are somewhat similar to limit orders, which can be setup with specific criteria. The difference is that contingent orders can be placed on the same position (e.g. two limit orders on the same option position). Limit orders also appear in order books, whereas contingent orders are only seen on a brokerage platform. This can be important in illiquid markets where some level of manipulation may occur.
Most advanced brokers offer the ability to place contingent orders, but more basic brokers may not have the functionality built into their platform. When placing an order on supported broker platforms, traders can typically define the primary order and then select contingent, or conditional, criteria. These criteria usually consist of a price, time, or volume trigger, along with the follow-on order ticker, price, and order type. If the criteria are met, the contingent order will be executed as it's defined and the trader will have both positions open at the same time.
Contingent Order Example
Contingent orders are most commonly used in the options market since many options trades have many 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 them, the trader could experience an unexpected loss. The contingent order makes sure that the position is opened exactly as the trader expects.