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.

  1. Trade Trigger

    A trade trigger is any type of event that meets the criteria ...
  2. Exposure Trigger

    Exposure Trigger is an event that causes a policyholder’s insurance ...
  3. Injury-In-Fact Trigger

    Injury-in-fact trigger is a coverage trigger theory that states ...
  4. Equity Derivative

    An equity derivative is a trading instrument which is based on ...
  5. Outright Option

    An outright option is an option that is bought or sold individually. ...
  6. Profit Taking

    Profit taking is the act of selling a security in order to lock ...
Related Articles
  1. Trading

    Derivatives 101

    Learn how to use derivatives to hedge, speculate or increase leverage in an investment portfolio.
  2. Trading

    Options Basics Tutorial

    Discover the world of options, from primary concepts to how options work and why you might use them.
  3. Trading

    Only Take a Trade If It Passes This 5-Step Test

    Not every moment is a good trading opportunity. Put each trade through this five-step test.
  4. Managing Wealth

    Cost Basis 101: How To Correctly Understand It

    Understanding how to calculate cost basis is critical for tracking the gains or losses of an investment, and what the tax consequences on it are.
  5. Personal Finance

    4 Derivative Sales Career Paths

    Discover some sell-side career paths of derivatives markets that offer some unique opportunities for career seekers in this article.
  6. Trading

    Use Price Action Trading Strategy for Results

    Bored by the fixed rules of technical and fundamental analysis? Price action trading allows you to customize your own trading strategy.
  7. Trading

    The Basics of Options Profitability

    Learn the various ways traders make money with options, and how it works.
  8. Trading

    How to Sell Put Options to Benefit in Any Market

    The sale of a put allows market players to potentially own the underlying security at a future date, at a price below the current market price.
  9. Trading

    Beginners Guide To Options Strategies

    Find out four simple ways to profit from call and put options strategies.
  10. Investing

    Why Options Trading Is Not for the Faint of Heart

    Trading options is not easy and should only be done under the guidance of a professional.
  1. What is the difference between a long position and a call option?

    Learn what a long position in a stock is, what a call option is, and the difference between owning shares of a company and ... Read Answer >>
  2. When is a put option considered to be 'in the money?'

    Learn about put options, how these financial derivatives work, and when put options are considered to be in the money related ... Read Answer >>
  3. How big is the derivatives market?

    Learn how different calculations can reduce the estimate of the total derivatives market by as much as 90 to 95%. Read Answer >>
Trading Center