Pattern Day Trading Rule

Does this rule apply to SPY option trader?


http://www.patterndaytraderrule.com/

best thing is to ask your broker - since you read the part about:



The pattern day trader rule applies to all brokers in the United States who are NASD members. There may be foreign brokers who are not directly regulated by NASD and offer pattern day trading to clients with less than $25,000 in their account.

This rule only applies to stock and option trading. There is no pattern day trading rule regulations currently on futures or forex.

Yes. As far as I know, it does.

Does this rule apply to SPY option trader?


http://www.patterndaytraderrule.com/

from experience I speak, YES it sure does.

only way around the rule is to trade options in a cash account, no margin. Thats how I got around it. I now have 2 accounts where I trade options almost daily, one is a margin account the other is a cash account. Obviously in a cash account you can't sell premium --so if you want to create spreads, risk reversals, or other trades/strategies that involve buying an option and selling another against it, you need margin. Thats how I came to 2 separate options accounts, one for more complex trades, the other for trades that I know will be a long option only and could end up being extremely short term and rack up the number of round trips I make.

Also, its important to realize that in a cash account your funds are subject to clearing times too. HOWEVER, for options trades, settlement completes the next business day after a sale, and buys clear the day after the position is opened. So you wont run into the typical problems a cash account poses, such as 3 day waiting for trades/funds to settle/clear, the rule where you cant buy with funds because even though a sale settled the buy never settled (forget the name of the rule? ). Obviously you wont be able to buy something, sell it, and use those funds same day, but those funds are available the next day, so no biggie IMO.

Would I have only a cash acct to trade? Never. Does it serve its purpose for my options trading? Sure does, because that 3-4 day settlement time does not exist for options. would I trade stocks in a cash account vs options? No, unless it was a fairly long term position. I know I have two separate accounts with td ameritrade (one margin one cash, both for options trading only) so if you're worried about having to use a different broker for the 2nd acct, you might not have to. FWIW I also have margin accts at interactive brokers for futures/forex and etrade for trading actual shares not options

Edit to add: 1 thing to beware of when trading options in a margin account is this: If you open a position in more than 1 trade, you get a roundtrip for EACH sale you make that same day, even if there are less opens than closes. Example: you buy 10 contracts of XYZ at 45 cents, buy 10 more at 30 cents, then sell all 20 throughout the afternoon, 5 contracts at a time...thats four RTs. If you only made one trade to open, and bought 20 contracts of XYZ at 45 cents, you could sell it as many times as you wanted, 1 contract at a time even, and only have 1 RT. Makes no sense IMO but burned me once.

Edited by Jhoe, 22 February 2011 - 05:31 PM.

VM, you have a call on your account but your broker will take care of it so long as the value of your options does not go under 25K. You may have to call your broker personally but its a non-issue so long as the actual current value of your positions (stocks + options + cash + bonds + etc. etc.) is above the threshold on the close. There is no need for 2 accounts to handle this situation. Also, your actual value can indeed go below the threshhold with no penalty UNLESS you trade more than 3 within any running 5 trading day period after going below the threshold. So, again, no problemo even if you are less than $25K so long as you keep an eye on the number of day trades (buy and then sell on the same day) within the past 5 TD's. Each day trade is expunged after 5 TD's. Hope this helps. BW

Edited by BWTrader, 22 February 2011 - 08:57 PM.

VM, you have a call on your account but your broker will take care of it so long as the value of your options does not go under 25K. You may have to call your broker personally but its a non-issue so long as the actual current value of your positions (stocks + options + cash + bonds + etc. etc.) is above the threshold on the close. There is no need for 2 accounts to handle this situation. Also, your actual value can indeed go below the threshhold with no penalty UNLESS you trade more than 3 within any running 5 trading day period after going below the threshold. So, again, no problemo even if you are less than $25K so long as you keep an eye on the number of day trades (buy and then sell on the same day) within the past 5 TD's. Each day trade is expunged after 5 TD's. Hope this helps.

BW

Edit: you may be forced into a cash account until you build back up to 25K. Even so, you can day trade in a cash account...just not more than 3 tmes in any running 5 trading day period. If you do you will get put in the penalty box.

Thanks to all.