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. 

Frequently Asked Questions

There are three types of trigger options: 

  • NAV Appreciation/Depreciation Trigger 

This feature allows the investor to specify the percentage increase or decrease in NAV as the exit trigger. NAV can increase or decrease by a minimum of 5% and then by multiples of 1%. The trigger’s applicable NAV for the transaction will be that of the day it was activated when it was triggered. 

  • Index Level Appreciation / Depreciation Trigger 

With this capability, the investor would specify the index level as the trigger to redeem or switch from one scheme to another.  

Capital Appreciation / Depreciation 

Investors can specify the capital appreciation/depreciation in monetary terms to activate the trigger under this facility.  

The trigger price in the stock market is the point at which your buy or sell order is made available to the exchange servers for processing. In other words, the order is submitted to the exchange computers as soon as the stock price reaches the trigger price that you have chosen. 

In cryptocurrency, the trigger option is the lowest or maximum limit order that can be made for buy and sell orders. The best bid/ask at market price will be used by default if the trigger price is not defined. 

To establish a point where a stock may be considered cheap or overvalued compared to its average price over that period, trigger prices are often calculated using information from the stock’s previous trading range.  

Trigger pricing can aid traders in avoiding being forced to hold an asset they do not desire in this manner. Although buyers and sellers can utilize trigger prices, they are most frequently employed to set stop-loss orders by automatically selling stocks when their price drops below the trigger level. This is advantageous since it guarantees the sale of the shares even if the trader nods off or leaves his computer unattended. 

A trigger Investment Plan (TRIP) allows investors to divide their capital across various funds according to index levels. The facility will automatically swap the investors’ units from the selected scheme to another upon the occurrence of such triggers (market falls and climbs beyond the Index level), which the investor has chosen (wherever the facility is available). The trigger may be either an upward or downward trigger. Unitholders can set triggers (events) using the TRIP facility based on the closing index levels. 

Related Terms

    Read the Latest Market Journal

    From $50 to $100: Unveiling the Impact of Inflation

    Published on Apr 12, 2024 32 

    In recent years, inflation has become a hot topic, evoking strong emotions as the cost...

    Japan’s Economic Resurgence: Unveiling the Tailwinds Behind Nikkei 225’s Record Leap

    Published on Apr 11, 2024 51 

    Source: eSignal, Intercontinental Exchange, Inc. In the heart of Japan’s economic landscape, the Nikkei 225...

    Weekly Updates 8/4/24 – 12/4/24

    Published on Apr 8, 2024 92 

      This weekly update is designed to help you stay informed and relate economic and...

    What Makes Forex Trading Attractive?

    Published on Apr 2, 2024 172 

    In a world where the click of a button can send goods across oceans and...

    Weekly Updates 1/4/24 – 5/4/24

    Published on Apr 1, 2024 93 

    This weekly update is designed to help you stay informed and relate economic and company...

    How to soar higher with Positive Carry!

    Published on Mar 28, 2024 124 

    As US Fed interest rates are predicted to rise 6 times this year, it’s best...

    Why 2024 Offers A Small Window of Opportunity and How to Position Yourself to Capture It

    Published on Mar 28, 2024 171 

    With the Federal Reserve (FED) finally indicating rate cuts in 2024, we witnessed a significant...

    Weekly Updates 25/3/24 – 29/3/24

    Published on Mar 25, 2024 75 

    This weekly update is designed to help you stay informed and relate economic and company...

    Contact us to Open an Account

    Need Assistance? Share your Details and we’ll get back to you

    IMPORTANT INFORMATION

    This material is provided by Phillip Capital Management (S) Ltd (“PCM”) for general information only and does not constitute a recommendation, an offer to sell, or a solicitation of any offer to invest in any of the exchange-traded fund (“ETF”) or the unit trust (“Products”) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. You should read the Prospectus and the accompanying Product Highlights Sheet (“PHS”) for key features, key risks and other important information of the Products and obtain advice from a financial adviser (“FA“) pursuant to a separate engagement before making a commitment to invest in the Products. In the event that you choose not to obtain advice from a FA, you should assess whether the Products are suitable for you before proceeding to invest. A copy of the Prospectus and PHS are available from PCM, any of its Participating Dealers (“PDs“) for the ETF, or any of its authorised distributors for the unit trust managed by PCM.  

    An ETF is not like a typical unit trust as the units of the ETF (the “Units“) are to be listed and traded like any share on the Singapore Exchange Securities Trading Limited (“SGX-ST”). Listing on the SGX-ST does not guarantee a liquid market for the Units which may be traded at prices above or below its NAV or may be suspended or delisted. Investors may buy or sell the Units on SGX-ST when it is listed. Investors cannot create or redeem Units directly with PCM and have no rights to request PCM to redeem or purchase their Units. Creation and redemption of Units are through PDs if investors are clients of the PDs, who have no obligation to agree to create or redeem Units on behalf of any investor and may impose terms and conditions in connection with such creation or redemption orders. Please refer to the Prospectus of the ETF for more details.  

    Investments are subject to investment risks including the possible loss of the principal amount invested. The purchase of a unit in a fund is not the same as placing your money on deposit with a bank or deposit-taking company. There is no guarantee as to the amount of capital invested or return received. The value of the units and the income accruing to the units may fall or rise. Past performance is not necessarily indicative of the future or likely performance of the Products. There can be no assurance that investment objectives will be achieved.  

    Where applicable, fund(s) may invest in financial derivatives and/or participate in securities lending and repurchase transactions for the purpose of hedging and/or efficient portfolio management, subject to the relevant regulatory requirements. PCM reserves the discretion to determine if currency exposure should be hedged actively, passively or not at all, in the best interest of the Products.  

    The regular dividend distributions, out of either income and/or capital, are not guaranteed and subject to PCM’s discretion. Past payout yields and payments do not represent future payout yields and payments. Such dividend distributions will reduce the available capital for reinvestment and may result in an immediate decrease in the net asset value (“NAV”) of the Products. Please refer to <www.phillipfunds.com> for more information in relation to the dividend distributions.  

    The information provided herein may be obtained or compiled from public and/or third party sources that PCM has no reason to believe are unreliable. Any opinion or view herein is an expression of belief of the individual author or the indicated source (as applicable) only. PCM makes no representation or warranty that such information is accurate, complete, verified or should be relied upon as such. The information does not constitute, and should not be used as a substitute for tax, legal or investment advice.  

    The information herein are not for any person in any jurisdiction or country where such distribution or availability for use would contravene any applicable law or regulation or would subject PCM to any registration or licensing requirement in such jurisdiction or country. The Products is not offered to U.S. Persons. PhillipCapital Group of Companies, including PCM, their affiliates and/or their officers, directors and/or employees may own or have positions in the Products. Any member of the PhillipCapital Group of Companies may have acted upon or used the information, analyses and opinions herein before they have been published. 

    This advertisement has not been reviewed by the Monetary Authority of Singapore.  

     

    Phillip Capital Management (S) Ltd (Co. Reg. No. 199905233W)  
    250 North Bridge Road #06-00, Raffles City Tower ,Singapore 179101 
    Tel: (65) 6230 8133 Fax: (65) 65383066 www.phillipfunds.com