Finra rules for day trading options


In general, failing to pay for a security before you sell the security in a cash account violates the free-riding prohibition. If you free-ride, your broker is required to place a day freeze on the account.

No, the rule applies to all day trades, whether you use leverage margin or not. For example, many options contracts require that you pay for the option in full. As such, there is no leverage used to purchase the options. Nonetheless, if you engage in numerous options transactions during the day you are still subject to intra-day risk.

You may not be able to realize the profit on the transaction that you had hoped for and may indeed incur substantial loss due to a pattern of day-trading options.

Again, the day-trading margin rule is designed to require that funds be in the account where the trading and risk is occurring. Can I withdraw funds that I use to meet the minimum equity requirement or day-trading margin call immediately after they are deposited?

No, any funds used to meet the day-trading minimum equity requirement or to meet any day-trading margin calls must remain in your account for two business days following the close of business on any day when the deposit is required. Frequently Asked Questions Why the change? Were investors given an opportunity to comment on the rules?

Definitions What is a day trade? Does the rule affect short sales? Does the rule apply to day-trading options? The day-trading margin rule applies to day trading in any security, including options. What is a pattern day trader? Day-Trading Minimum Equity Requirement What is the minimum equity requirement for a pattern day trader?

Can I cross-guarantee my accounts to meet the minimum equity requirement? Buying Power What is my day-trading buying power under the rules? Margin Calls What if I exceed my day-trading buying power? Accounts Does this rule change apply to cash accounts? Does this rule apply only if I use leverage?

An instance of free-riding will cause a cash account to be restricted for 90 days to purchasing securities with cash up front. During this day period, the investor must fully pay for any purchase on the date of the trade. Requirements for the entry of day trading orders by means of "pattern day trader" amendments: While all investments have some inherent level of risk, day trading is considered by the SEC to have significantly higher risk than buy and hold strategies.

The Securities and Exchange Commission SEC approved amendments to self-regulatory organization rules to address the intra-day risks associated with customers conducting day trading. The rule amendments require that equity and maintenance margin be deposited and maintained in customer accounts that engage in a pattern of day trading in amounts sufficient to support the risks associated with such trading activities. In other words, the SEC uses the account size of the trader as a measure of the sophistication of the trader.

This rule essentially works to restrict less sophisticated traders from day trading by disabling the traders ability to continue to engage in day trading activities unless they have sufficient assets on deposit in the account. On the other hand, some argue that it is problematic not because it is some sort of unfair over-regulatory attack on the "free market," but because it is a rule that shuts out the vast majority of the American public from taking advantage of an excellent way to grow wealth.

Another argument made by opponents, is that the rule may, in some circumstances, increase a trader's risk. For example, a trader may use 3 day trades, and then enter a fourth position to hold overnight.

If unexpected news causes the security to rapidly decrease in price, the trader is presented with two choices. One choice would be to continue to hold the stock overnight, and risk a large loss of capital. The other choice would be to close the position, protecting his capital, and perhaps inappropriately fall under the day-trading rule, as this would now be a 4th day trade within the period.

Of course, if the trader is aware of this well-known rule, he should not open the 4th position unless he or she intends to hold it overnight. However, even trades made within the three trade limit the 4th being the one that would send the trader over the Pattern Day Trader threshold are arguably going to involve higher risk, as the trader has an incentive to hold longer than he or she might if they were afforded the freedom to exit a position and reenter at a later time.

In this sense, a strong argument can be made that the rule inadvertently increases the trader's likelihood of incurring extra risk to make his trades "fit" within his or her allotted three-day trades per 5 days unless the investor has substantial capital. This is because the firm will have a "reasonable belief" that you are a pattern day trader based on your prior trading activities. However, it is possible that a customer will decide to stop day trading.

You should contact your firm if you have decided to reduce or cease your day-trading activities to discuss the appropriate coding of your account. Can I cross-guarantee my accounts to meet the minimum equity requirement? No, you can't use a cross-guarantee to meet any of the day-trading margin requirements. Each day-trading account is required to meet the minimum equity requirement independently, using only the financial resources available in the account.

What happens if the equity in my account falls below the minimum equity requirement? The money must be in the brokerage account because that is where the trading and risk is occurring. These funds are required to support the risks associated with day-trading activities. What is my day-trading buying power under the rules? You can trade up to four times your maintenance margin excess as of the close of business of the previous day. It is important to note that your firm may impose a higher minimum equity requirement or may restrict your trading to less than four times the day trader's maintenance margin excess.

You should contact your brokerage firm to obtain more information on whether it imposes more stringent margin requirements.

What if I exceed my day-trading buying power? Then your brokerage firm will likely issue a day-trading margin call to you. You will have, at most, five business days to deposit funds to meet this day-trading margin call. Until the margin call is met, your day-trading account will be restricted to day-trading buying power of only two times maintenance margin excess based on your daily total trading commitment.