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. 

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