Trigger Option

Trigger Option

Triggers are items that could cause someone to behave. In investing, triggers may result in the system or the investor taking a particular action. 

What is a trigger option? 

Triggers are options made available to unit holders as part of systematic withdrawal plans to enable automated redemption upon the occurrence of a desired event.  

An investor can benefit from market changes with the help of triggers without having to keep track of everything constantly. Investors can also employ triggers as a powerful instrument for downside protection. 

Understanding the trigger option 

As the name implies, triggers are things that might lead to action. Triggers in the context of investing are market or investment-related occurrences that may cause the system or the investor to take a certain action. An event (trigger condition) and an activity taken when the event occurs make up a basic trigger setup. The system may act automatically or manually (in some cases). 

A unit holder may choose to use this facility at any time by making a formal application. In this case, the full account will be repaid when the selected event transpires. A letter to that effect, stating the folio number, name of the scheme, the transaction for which the trigger is to be terminated, the amount, etc., could be used to cancel a mandate of triggers. 

Advantages of the trigger option 

Setting a trigger allows you to book gains in an up-trending market automatically. The trigger is activated as soon as your fund achieves a specific gain. Investors that use trigger funds benefit from investing in equities. For investors, seeing increases on paper is insufficient. 

Using triggers, you can profit from favorable valuations when the market is losing ground. Frequently, when the market declines, investors who yearned for lower valuations when it was up become paralyzed. They can prevent succumbing to dread by establishing a predetermined trigger. 

Disadvantages of the trigger option 

There are a few potential disadvantages to using the trigger option in stock market trading. 

• First, if the stock price falls below the trigger price, the trade will not be executed, and the investor will miss out on the opportunity to buy the stock at a lower price.  
• The trigger option can add complexity to the trade, making it more difficult to execute.  
• The trigger option may not be available on all stocks, so investors may trade without it if they want to buy a particular stock. 
• Trade triggers can add a discipline element to the trading process by implementing rules determined by the trader.  

• Traders frequently use trade triggers to make compound orders, depending on several criteria being satisfied. Traders need to make sure their trade triggers hold up over time. 

Example of a trigger option 

Consider a scenario where a trader wishes to open a covered call position. If the trade goes through, the trader can put a limit order to buy 100 shares and, should it succeed, and sell a call option on the newly acquired stock. By employing trade triggers, the trader can avoid worrying about waiting for the first order to be placed before manually placing the second transaction. The trader knows that both charges were put in at reasonable prices. 

Traders might also want to make a buy with the money they get from a transaction. For instance, a trader might set up a trade trigger to utilize the proceeds from selling one option contract to close out another option position. So, the trader can concentrate on finding new chances rather than worrying about the time of the second trade. 

Triggers can be utilized to give a plan of action another leg. A trader might, for instance, have a contingent limit order to sell a put and a limit order to buy a put. The danger of placing incorrect trades or waiting too long to open or change a trade can be reduced by using this method to help traders build sophisticated options strategies without executing individual contracts. 

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