What is a 'Cash Trigger'

A cash trigger condition that triggers an investor to make a trade or take a specific action, such as buying or selling a financial product such as a stock, option, futures contract, bond, or currency.

A trigger can be self imposed, or market imposed. Self imposed cash triggers are most common amount retail investors, and include deciding to make a purchase if a stock rises a pre-determined price, or to sell a stock if falls below a specific price. Market imposed cash triggers can occur on over the counter options, when a transaction or action is taken when the price of an asset reaches a certain level. 

Breaking Down the 'Cash Trigger'

A cash trigger is the price at which an investor takes action. Traders often put out orders at these levels, so that when the price reaches the level they will enter or exit a trade. For example, if a trader is long a stock at $20, but wants to get out of the trade if the stock falls below $15, they could put a stop loss order at $15. The stop loss order gets them out of the trader if the price drops below $15, with $15 being the trigger price as well as the order price in this case.

Similarly, if a trader has been watching a stock start to move higher after a prolonged decline, they may decide to enter, but only if the stock keeps rising above a prior peak. If the former price peak was $60, the trader could place a stop buy order just above $60. The order won't fill until the price moves above $60. The cash trigger is $60, but is also where an order can be placed. 

These are referred to as cash triggers because they result in an inflow or outflow of cash from the account.

Some investors choose to set alerts instead of orders at cash trigger levels. In the case above, instead of placing an order the investor may simply watch the price, and then execute a trade manually at the cash trigger level.

Other Types of Cash Triggers

Another type of cash trigger is present in knock-in or knock-out options, for example. These are financial products where something specific occurs if a specific price is reached. 

In a knock-in option, the option only comes into existence if the underlying asset reaches the knock-in price. This could result in additional premiums being paid and new obligations or rights on the new option.

In a knock-out option, the option ceases to exist if the underlying asset touches the knock-out price.

Such products trigger something when a specific price is reached. Unlike the other self-imposed cash triggers mentioned prior, these types of triggers are built into the product.

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