Exchanges (PDF) require brokers to have risk management checks that prevent freak trades in options at prices significantly away from theoretical prices. You receive this rejection message when your order falls outside the acceptable price range.
Consider this example: A stock trades at ₹95 and its 100 Strike Call option trades at ₹5. If you place a buy order at ₹50 while the stock still trades at ₹95, this trade would be away from the theoretical price.
Such freak trades disrupt price discovery and cause traders to incur huge losses.
Types of freak trades
Accidental freak trades: You might unwittingly place orders much larger than intended or at wrong prices.
Intentional freak trades: Fraudulent actors with access to trading accounts can move money between accounts by creating artificial losses. They do this by buying illiquid option contracts at Much higher than the theoretical price and reversing trades at lower prices.
Zerodha's protection measures
To protect you from freak trades, Zerodha allows you to place option orders only within a range from the theoretical price of the contract. Additionally:
- Zerodha doesn't allow market orders in illiquid index options and stock option contracts
- Exchanges have stopped supporting Stop Loss Market (SL-M) orders for option contracts for the same reason
How to resolve this error
Ensure that:
- You haven't mistakenly selected the wrong option contract
- Your order price is closer to the theoretical price
You can still place orders outside Zerodha's theoretical range using Good Till Triggered (GTT) orders. However, when your GTT triggers, the system applies the same theoretical range checks and will reject your order if it falls outside the range.