Cover order (CO) on Zerodha

A cover order (CO) is a special intraday order type on Kite, Zerodha’s trading platform, that combines an entry order with a compulsory stop-loss order placed simultaneously. The mandatory stop-loss is placed as an SL-M (Stop Loss Market) order at the time the entry order is submitted. Because the maximum possible loss on the position is pre-defined by the stop-loss range, the exchange and broker can offer higher leverage (lower margin requirement) for cover orders compared with standard MIS intraday orders.

Cover orders are available on both the National Stock Exchange and the Bombay Stock Exchange and are supported for equity and equity derivatives segments on Kite.

Structure of a cover order

A cover order consists of two legs placed together:

1. Entry leg: A market order or limit order to open the intraday position.
2. Stop-loss leg: A compulsory SL-M order whose trigger price defines the maximum loss boundary.

Both legs are submitted simultaneously. The stop-loss leg becomes a pending SL-M order in the exchange’s contingent order pool immediately upon placement. It cannot be cancelled independently, the only way to remove the stop-loss is to exit the position entirely (which auto-cancels the stop-loss leg) or to modify the stop-loss trigger within permitted bounds.

Parameters for a cover order

• Entry type: Market or limit.
• Trigger price (stop-loss): The SL-M trigger price. For a buy cover order, this must be below the current market price. For a sell cover order, it must be above.
• Quantity: Number of shares or lots.
• Product: Cover orders use the CO product code (not MIS or CNC).

How margin is calculated for cover orders

The reduced margin for a cover order is derived from the maximum possible loss. If a trader buys 100 shares at Rs 100 with a stop-loss trigger at Rs 97, the maximum loss per share is Rs 3 (3% of the entry price). The margin required is based on this Rs 3 maximum loss rather than the full SPAN or VAR margin applicable to normal intraday orders.

The formula approximately is:

CO margin = (Entry price - Stop-loss trigger) × Quantity × multiplier

The multiplier accounts for execution slippage and exchange-imposed buffers. Zerodha publishes the specific CO margin requirements for each instrument on its margin calculator at zerodha.com/margin-calculator.

In practice, CO margin can be 20–50% lower than standard MIS margin for the same position, depending on how tight the stop-loss range is set. Tighter stop-losses (closer to the entry price) result in lower margin requirements.

Modifying the stop-loss in a cover order

The stop-loss leg of a cover order can be modified on Kite, but only within limits:

• The new trigger price must remain on the same side of the entry price as the original (it cannot be moved past the entry price to convert the stop into a target).
• For a buy cover order, the stop can be moved up (tightened) but not above the entry price.
• For a sell cover order, the stop can be moved down (tightened) but not below the entry price.

This means a trader can trail the stop-loss upward as the position moves in their favour, but cannot move it to a level that would convert the trade from a stop into a profit-lock.

Exiting a cover order

There are two ways to exit a cover order position:

1. Stop-loss triggered. If the market reaches the SL-M trigger, the stop-loss leg fires automatically and the position is closed at market. The entry leg is simultaneously marked as completed.
2. Manual exit. The trader can exit the position manually using the “Exit” button on Kite’s positions panel. This simultaneously cancels the stop-loss leg and places a market order to close the entry position.

A trader cannot exit a cover order position by placing a separate opposite-direction order of the same instrument, this would create a net-zero position but the CO entry would still be open with its stop-loss pending, resulting in a mis-hedged margin state. The correct exit is always through the CO exit interface.

Auto-square-off

Like all intraday orders on Kite, cover orders are subject to auto-square-off at approximately 3:20 PM if not already exited. Zerodha’s system closes all open CO positions at this time, charging a penalty fee (as of 2024, Rs 50 per position) for positions that require auto-square-off.

Segment and instrument availability

Cover orders are available for:

Zerodha periodically updates the list of instruments eligible for CO. Illiquid or highly volatile instruments may be excluded from CO eligibility.

Cover order versus MIS and bracket order

The bracket order was a more feature-rich variant of the cover order, adding a target leg and trailing stop-loss. Zerodha discontinued bracket orders in 2020, retaining the cover order as the primary enhanced-margin intraday product.

Common mistakes and edge cases

Tight stop-loss and slippage. Because the stop-loss leg is an SL-M, it fills at market after the trigger is hit. In a fast-moving stock, the actual fill can be below the trigger (for a buy CO stop). The margin saved by a tight stop-loss can be partially eroded by slippage on the stop execution.

Cannot place CO outside market hours. Cover orders cannot be placed as AMO. They must be placed during live market hours. Traders who want overnight protection should use GTT or a standard SL order with CNC/NRML product codes.

Position netted but stop-loss remains. If a trader accidentally places an opposite-direction order (not using the CO exit interface) that nets the position to zero, the CO stop-loss leg may remain in a pending state and fire unexpectedly, creating an unintended position.

Margin call interaction. If market-to-market losses on other positions reduce available margin below the CO margin requirement during the session, Zerodha may liquidate CO positions as part of the margin call process, even if the SL-M has not been triggered.

Regulatory context

Cover orders are recognised by SEBI and the exchanges as a legitimate intraday product type that qualifies for reduced margin on account of the mandatory stop-loss. NSE’s margin circular framework explicitly provides for reduced intraday margins when a matching stop-loss order is simultaneously placed and cannot be independently cancelled. SEBI’s risk management framework for brokers permits this margin reduction provided brokers maintain adequate monitoring to ensure the stop-loss is not circumvented.

References

1. NSE circular on cover order margin framework, NSE/MEM/2010 series.
2. SEBI risk management circular for stock brokers, SEBI/HO/MIRSD/2019 series.
3. Zerodha support article: “What is a cover order?”, support.zerodha.com.
4. Zerodha margin calculator documentation, zerodha.com/margin-calculator.
5. NSE Trading Member Circular on intraday margin products, NSE/CMPT/2015 series.