How spread betters can have it both ways

Stock markets can rise or fall on the back of economic news. If news is good, they rise; if it's bad, they fall. So do you buy or sell an index ahead of an announcement? An 'OCO' enables you to pounce either way, says Tim Bennett.

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As a novice, your best bet is to get to grips with the basic order types these are the limit order (specifying a 'no worse than' price); the market order ('get me in or out at the current price'); and the stop ('get me out at our agreed price, or close to it'). However, beyond those there are some fancier options. One of them is the 'OCO'.

The name is short for 'one cancels the other'. And it does pretty much what it says on the tin. For example, say you expect market volatility following an important piece of news - the latest non-farm payroll figures from the US, for example. If these come in lower than expected, the stock market and the US dollar will often react by falling. The opposite is true when they come in above expectation.

What's more, since the FTSE 100 here tends to track movements in the US Dow Jones, a good US figure often pushes our market up too. The question is: do you buy or sell the FTSE ahead of the announcement? Ideally, you want to be able to pounce either way. Enter the OCO.

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You could ask your broker to place one OCO order to buy the index at, say, 5,900 (on good data) and another to sell at 5,800 (on poor US data). If the FTSE rises sharply, the buy order executes and the sell gets cancelled, and vice versa.

Or, imagine you are already long the FTSE with a buy order. You could set up an OCO that sells at a price above the current index level (to lock in a profit) or sells below the current index level (to cap losses). The point is that one cancels the other so that you are not left with an unwanted open short position once the OCO has executed.

Sure, these are not order types that a beginner will usually need to use. But they can be useful in a number of situations (beyond the two outlined above) for the more experienced trader.

Tim Bennett

Tim graduated with a history degree from Cambridge University in 1989 and, after a year of travelling, joined the financial services firm Ernst and Young in 1990, qualifying as a chartered accountant in 1994.

He then moved into financial markets training, designing and running a variety of courses at graduate level and beyond for a range of organisations including the Securities and Investment Institute and UBS. He joined MoneyWeek in 2007.

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