Lesson Overview

How to Use Advanced & Contingent Orders

Nearly all of the trading we do here at Option Alpha is with single, limit orders. Still, there are some very creative ways to trade if you learn how to use advanced and contingent orders that can help automate the process of entering or exiting trades even if you work a full-time job during the week.

Show Video Transcript +

In this video update, I want to talk about how to use advanced or contingent orders in your trading. Now contingent or advanced orders allow you to set order triggers for stocks and options based on the price movement of the underlying stocks, ETF, index or contracts themselves.

Now nearly all of the trading that I do personally here on the order entry side, I'll use limit orders. I'll never use market orders, and today we're going to cover the four main types of contingent orders that you might use in your trading.

So the first one is a single contingent order. What the reality is, is that most of us are using this, we just don't even know it.

We use it mainly when we tried to offer a price or fill a trade at a price, that's maybe a little bit higher or a little bit lower than where the market is trading.

If you think about, let's say, an options price, you could say that the options price is here at number one, and you will buy the contract or sell the contract whenever the price gets up to whatever you determine.

Maybe you want to buy or sell the contract when it's 1.25% higher, whatever the case is. A $1.00 higher, $2.00 higher. You could also do it in reverse, if you're looking to get into a trade, where you're buying options, you could look at the option, and maybe option price is here, and you'll only buy it once it reaches some certain level, maybe $25 per contract, okay? So there are single contingent orders.

Let's go through an example here on my Think or Swim platform. Today we're just going to use Apple as an example, for their options. Right now the market is trading live.

This is where Apple is, well up a percent today based on the time that we're doing this video. Let's say for example, that you want to get a credit spread in Apple. You want to sell the $115, $120 call spread in Apple.

You do that, you bring up the order here, and you can see that this order naturally defaults to a single order. That's what most broker platforms do because they realize it's the most common type of order.

Now right now, the market is trading around $104, $103. You can see this price is probably going to start moving as we're talking about it, live time. You'll see here, at least on Think or Swim, that the padlock is open, meaning it's live, real-time pricing.

We have that locked in a specific price that we're going for. If we wanted to get into this trade, we could use this limit order that we have right now to get into the trade at the market price right now, or at least try to get into a trade at the market price and see if it fills.

Sometimes what we'll do, though, is we'll try to stretch and reach for a higher credit, and this is an example of using a single contingent order. Let's just be exaggerated here, but again the market is trading, right now, at about $103. Let's say that you'll only get into this spread if it's at $130, all right?

I might not do this in a regular scenario, but again just to exaggerate the process here. You can see again, what we're going to do here, is we're only going to sell this vertical call spread in Apple if the price of the security gets up to $130.

Now remember the price of this security right now is trading, or the spread is trading at $103, so this is a contingent order that says, get me in, but only if, it gets up to a certain price in the future.

We use these a lot actually when we're trying stretch for pricing, so sometimes we'll stretch maybe a couple of pennies higher. If the market is trading at $103, maybe we shoot for $105, or $106.

So, something a little bit higher, kind of reach for a higher price, let the market come to us, in a sense, and try to get a higher price point. Now let's take the opposite trade, for example, so let's say they we're maybe bearish on Apple and we want to buy a debit spread.

So, now we're buying options, and we try to buy the $110, $105, put spread, it's trading right now for about $202. Again you can see the padlock is open, so now we know this is the price that the market is trading at, and again this might change.

Let's say instead of paying $102, or $202 for this thing; you want to pay again, something exaggerated just to prove a point, you'll only pay $185 for this spread.

Again if we hit confirm and send, you can see this order is only going to get filled at $185. But the spread is trading for $202. This is your contingency on a down site when you're entering a trade that you'll only get filled at these prices.

The way that we use these here, as we talked about in the previous video, we're talking about options pricing, is setting a price that's fair and appropriate for the risk.

Usually with credit spreads, because we went through a lot of examples with credit spreads, in the last video here at track two. What we would do, is we would set a price, let's say for this credit spread. Set a price that we think is fair.

If we think a $125 credit is fair based on the probability of being in the money, or whatever the case is, we'll set that credit and kind of let that trade work, okay, for a little bit.

Again, we're not going to try to set it too far out to bounds from where the market is right now, so if the market is $40 or $50 off, there's probably low likelihood that it's going to get filled.

Don't waste your time in setting a contingent order that high, or if the market is $30 off and you're trying to buy it for $60 lower, don't waste your time tiring to set an order that's that far off.

Maybe $10 or $15 at the most, let the market come to you. It's a really good way to use these contingent orders on the single basis. On single basis for order entry and kind of save time, especially if you work a day job or can't get to the market all the time.

Now the other type of order that you can have is multiple contingent orders. This is an example of a multiple contingent order with stock, but it proves a point, then we'll look at it with options.

Let's say that the stock right now is trading at $25, well you could have a contingent order to sell out of this security at some price in the future, maybe $32 above the market.

Whenever the value of the option goes up to $32, or if the value of the option goes down to $20 or the value of the stock goes down to $20, then you have an order to sell down there, as well.

Basically, two exit points for your trade if the stock goes up you can sell at a profit, if it goes down, you can sell it at a loss. You have these multiple contingencies that go in with an order.

Let's look at an example of that on our Think or Swim platform. Again we're going to use Apple here as the example for everything that we do, just so we stay consistent, and we'll sell that base order of the call credit spread in Apple, which is the $115, $120.

In this case what we have done here is we have changed the advanced order type from single to first triggers all. You can just do this here.

Most option broker platforms have the ability to do a single order or first triggers all. There's a bunch of these which we'll continue to get through here on this video.

First triggers all means, once this first order gets filled, so this order that we're going to place here first, it's going to trigger a series of other orders. There can be a lot of them that come behind it.

We'll only do two in this example, but it's going to trigger a series of other orders that are now going to work after the first order gets placed. This is a great way to use these advanced order features if you are working a day job or if you don't have access to the markets.

You can say, hey look, as long as I get into this trade, also place the contingent orders for my profit target, and for my exit of the trade if I want to use this stop loss, or whatever the case is. Again, this is how we get it done.

The first order gets in, and we want to get it filled at whatever price. Let's say we stretch here and we want to get a $105 credit. Well now all we're going to do, is we're going to go in, immediately, as we've already built the first order to enter, and we're going to build out our exit order, or our profit taking the order.

We're going to go here to the $115, $120 and this time we're going to buy the vertical spread back. That's what we would do to exit the trade. To enter the trade, we'd sell this spread. To exit the trade, we buy it back.

Now this is going to be our profit taking order, and in this case, we're going to buy it back once it's decaying in value about 50%. That's usually what we try to do with some of these credit spreads.

We're going to place that contingent set order that says, okay buy it back. If it gets filled for $105 credit, buy it back for a $50 debit, which again, this would be our profit taking order, or profit taking part of it, as we looked at in the graph on our slides here.

We're also going to place our stop loss order if you want to use one. We do not use one all the time, but this is how we would place it.

If you want to place a stop loss order, you go in, and you do the same thing, where you go over and create a buy order, but in this case, instead of using a limit, you'd say, I want to use a stop.

So, in this case, we're going to use a stop order that says, okay, look, if the value of this spread goes up from $100 or $105 up to $200, I want you to get out of the trade.

Now we have both sides of the exit covered if you want to do this. Again, this is just an example here. It's not necessarily exactly how we do it, but it proves a point of how you can use these contingent orders.

Now remember, this is all based on the first triggers all of these, so once this first order gets filled here, and you've got to build it out in sequence, then these other two orders will work until one of them are filled. That's how it will work out.

If I hit confirm and send here, you can see in the order confirmation and dialog box, it has your first order, your second and your third, and it says, basically, okay we're going to sell this vertical spread in Apple only at $105, and then, it's going to place these two other orders triggered, TRG, buy number one.

These two orders right here are only going to be working and trigger, if we get into Apple's original trade or this original call spread. That's how this multiple contingency order can work.

And again, you can have multiple kinds of orders behind here. You can have five or six or ten different orders behind you. I think you can get a little crazy obviously, but we usually like to do maybe one or two of these, if we ever do them.

Now, let's move on to OTO, which is one trigger other. Now, this is going to be a little bit different, because instead of a multiple contingencies, where you have two orders working at one time, you're going to say to the market, look, I want you to trigger a new order after just one order gets entered.

It's like a mini portion of the multiple ones that we just looked at. We'd say okay, look if the stock is trading at some price point here, which is number one, then I want to buy at a price point of say, $30.

When the stock drops down to $30, or when the option value drops to whatever, I want to buy in. I also then want to set some trailing stop limit, or some order profit taking target, whatever the case is.

I want one order, meaning the order entry to trigger another order behind it, but only one. One triggers one other order or OTO. Again, if we go back to our charts here, we'll get rid of this order entry.

We'll say, okay we're going to get back into this call credit spread in Apple. We're going to sell that as our initial. Now this time, instead of using first triggers all, advanced order, which triggers all of these multiple orders to work at the same time.

We're going to build out a sequence of orders or OTOs. One triggers another, which triggers, which triggers another, and again you can go as far as you want with this.

In our broker platform with Think or Swim, it's called first triggers other, and our first triggers sequential, or other brokers might say, OTO or one triggers other, but whatever the case is, just look for that, one triggers another type order sequence.

In this case, we're still going to say that we're going to sell this thing for $105, just to keep everything the same, and we're still going to build out our buy order as our profit target. We still build out that same profit target that we had before, of buying this back at $50.

If I hit, confirm and send just to give you an example of this, and then we'll build out more. You can see that first order of $105. Once that order gets filled, then our second order goes in as our profit taking the order, and it's triggered by the entry of order number one. So that's all it's saying.

Now where it becomes different is, let's say that after you make money on this trade, and let's say that number two order gets filled, meaning you're out of this trade completely with a profit.

Let's say for some reason; you think that Apple is going to be lower by that time, because you made a profit, and now you want to go in, and you want to buy a debit call spread in Apple.

Now instead of selling a call spread, you want to go in and buy a debit call spread. Again, I'm just using this as an example. This is not something we would do; I'm just trying to prove the point here.

If you wanted to, let's say, buy a debit call spread, I'd say $1.00, $3.50. Now when we see this order dialog box, you can it's a little bit different, meaning that every single order is triggered by the one above it in sequential order.

If we enter this trade and we sell this call spread at $105, then it's going to enter this order to get us out at $50. Again, triggered by the order entry of number one.

If we get out of the Apple trade completely with a profit, then we might want to go back in and buy a debit call spread, assuming that the markets come down, or whatever the case is, but that order is only triggered once order number two is filled.

Now this is different than our multiple contingency orders, where we had both of these orders going in at the same time, triggered by number one. In this case, each one is triggered by the one above it.

Again, you can get pretty creative, and I've seen a lot of crazy things happen here. We don't get all too fancy with everything here at Option Alpha. We usually have, maybe one triggered order behind it as profit taking order, and we'll go through that more in track number 3.

But, we will rarely do multiple contingencies like this. We just like to know exactly what we're getting into or not. There's no assuming that you know what this price point is in the future, but again I want you to understand how these multiple orders can work and how these different order types can be used.

Now, the last one that we're going to talk about is one cancels other. Now, I think this is a much better way to go about trading, because you're going to enter two orders at the same time, and the fill of one order will cancel the other order trying to get filled.

What I usually like to do, in this case, is I usually like to enter these orders when I'm trying to get into a trade, and I'll try at two different strike prices on either side and basically say look, whichever one fills first, I'll take that trade, I don't want to take the other one.

For example if a stock or some option is trading at say price point two, it'll say look, I want to sell it here, or I want to, basically buy it at some other price point, but if I get sold, meaning if the stock gets out, I want to cancel my additional buy order down here.

That's basically what it means. One order getting filled cancels out the other one completely and you don't have these trailing orders out there in the market.

Again, if we're going to use that same strike price before that, we used for Apple, where we sold the $115, $120 call spread. What we're going to do now is go down to OCO. In this case, right here on Think or Swim, there's an advanced order type called OCO, which is one cancels other.

We can place two different orders in the market. Let's say, we wanted to place two different spreads or two different spread trades, and we wanted to sell a call spread or a put spread, and we didn't care, which one gets filled first.

In this case, we could sell the $115, $120 call spread, and get $99, or we could sell the $100, $95 put spread and get $61. They have different probabilities of success, but for the sake of just making this simple in this video, again let's assume that we don't care, which one we get filled.

All we want to know is that we're getting into one of these two contracts. We might stretch a little bit here and say, okay if I can get into the call spread at $105 or I can get into the put spread at .70 versus .60, I'd be acceptable at either of these two ranges.

Now when I hit confirm and send here, you can see that both of these orders are going to be placed on the market at the same time.

That's the difference here with OCO, is that both orders are working at the same time, which is different than contingent orders, which have back up orders that only get placed, or are only working if the first order gets filled or if the sequence of orders gets filled.

With OCO, both orders are going to get placed into the market, which means at the same time, they're going to be trying to fill the call spread and the put spread. The key here is that whenever one of these orders gets filled, then the other order gets canceled.

Let's say for example, that both of these orders get working and immediately you're put credit spread gets filled at .70. Well, then the system will recognize that you want to cancel out of your credit call spread quickly because the first order got filled right away.

This is a great way to make a lot of assumptions about where markets might go, and kind of place these contingent orders. You can place three or four of these within the same security, as long as you do one OCO, which means that if any of these trades get filled, then I'm out of all the other trades altogether.

Another way that you could do this is you could do a strangle on top of this as well. You could say, okay, I want to do the credit call spread, the credit put spread, or I want to do the strangle at, let's say $95 and $120 for $127 credit, again it doesn't matter.

All three of these orders are going to get placed on the market at the same time. As soon as one of these orders gets filled, so let's say our put spread gets filled right away, then the strangle order gets erased and so does the credit call spread order gets erased.

Again, because that put spread order got filled. This is one that sometimes I will use if I'm not right in front of my screen and don't have the ability to trade.

If I know, I want to get into something in Apple, and as we talked about here in track number two, it doesn't make a difference, which way you trade it.

Generally you're going to have the same probability of success in payout and all that stuff. It's going to be fairly equal across the boards.

If I want to get into Apple, and I don't care necessarily, which trade I get into, as long as I get into one of them, then I might use an OCO type order to basically place this, kind of use these credits, to kind of stretch the market and see, which one gets filled at the highest price.

If that price gets, if that order gets filled, it cancels the other two orders. I don't use this all the time, but it is something that you can use. Again, this is great if you are working a day job, or don't have the ability to watch the markets all the time.

You can set your pricing based on the pricing stuff that we've talked about here in tract number two, and use these contingent orders to your advantage to set up these multiple situations to enter, but it will only fill one of the contracts and again keep your positions size and risk size controlled.

Here's the deal, even beyond these four main types, there are lots of variations. You probably saw as we were going through this video, there are triggers with OCOs, and blast orders, and pairs orders, there's a lot of different variations on order types and advanced orders.

But you don't need to use these to be successful. I can honestly tell after doing this for a very long time, that 99% of the trades that we place that order entries are just using a very simple single order. Now that's my style, that's the way that I like to trade because I want to know what I'm getting into.

Yes, we may use a small contingency of a single order, meaning fill at this price point, which may be $5 above or below the market, or whatever the case is, but for the vast, vast majority of the trading that we do, we do not use a lot of contingent orders.

However, I do feel it's important to go through these so that you understand the concept as we move further through track two and then eventually get to track number three, where we're talking about trade exits.

That's usually when contingent orders start coming into play a little bit more, is on trade exits, as you've probably seen in this video. It's a big topic. I get a lot of questions on it.

That's why I though it was really important to cover in this video. Again, most of the trading that we do here is with single order types. Now again, I appreciate it.

Thank you so much for taking a look at this video. If you have any comments or questions, or feedback. Let me know in the comments section right below.

If you love this video, thought it was helpful, to kind of clear up these contingency order questions that you might have had, please help us by sharing this video online, spreading the word about what we're trying to do here at Option Alpha. Until next time, happy trading.

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