This is a contingent order where by primary and secondary orders are created. When the primary order executes, the secondary order is triggered automatically. This means that the secondary order will become active and follow conditions set for its execution.
OTO saves time for the trader since traders can purchase a certain amount of options and sell the same set immediately once the buy order is done.
There are times when traders and investors may opt to combine the OTO order with Time-Forced instructions. In this case, when the primary order expires, it will result in the expiration of the secondary order.
The action is also similar to when the trader opts to cancel an order. If the primary order is cancelled, so will the secondary order.
How it works
One Triggers Other (OTO) is commonly used to place a limit order for buying an option at a particular price and a stop order for selling a particular number of shares. To place the OTO order, start by navigating to the order entry screen.
From here, you can input the primary order. For example, if you are planning to purchase 100 shares of Company A, your primary order will be composed of a Buy To Open order for Company A call at a limit price of 5.50. Once you are done, click preview. This will prompt you to enter the secondary order.
The secondary order will be composed of a sell stop order. Using our earlier example, we will assume that you are planning to sell the same contract you bought with the limit order.
You may decide to change the price for example you may opt to sell Company A shares at 4.20 or 6.20. Once you have completed the order, click preview to check the summary. If everything is ok, place the order.
What the system will do is purchase a contract of 100 shares of Company A when they attain a price of 5.50 and sell them when they attain a sale price of 4.20 or 6.20, depending with what you chose.
If you are in search of a trading strategy that will save you time, implement the One Triggers Other. Once you set the primary and secondary orders, the trading platform will execute them automatically. The good news is that both buy and sell orders can be set from the same account.