Last updated on August 6th, 2022 at 12:06 pm
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If you are a day trader looking to be a more active participant, you might have wondered what options are available for day trading — other than stocks, that is.
But did you know that options trading also counts as day trading?
Call/put options count as day trades since you can buy and sell these options within a day. Day trades cover virtually all securities, such as stocks, ETFs, bonds, as well as call and put options.
It counts as a day trade so long as you conduct a round trip (meaning buying and selling) on any of the securities in the same trading day.
Currently the only thing you can trade that is not subject to day trading rules is cryptocurrency.
In this article, you will find out more information regarding why call and put options count as day trades.
Why Do Call/Put Options Count As Day Trades?
Day trades take place when traders open and close security positions in a day or within the same day. In other words, for a trade to qualify as a day trade, you need to buy and sell your security within the same calendar day or trading session.
You could also sell and then purchase the same option on the same day.
And since you can only trade options between 9:30 AM and 4:00 PM EST, it means that buying and selling an options contract during that time qualifies as a day trade.
In addition, because you are under no compulsion to hold options until they expire, you can buy and sell call and put options within the same day. Also, you are free to purchase or sell options with any expiry upon their expiry or even before.
Furthermore, you can close a position after a minute or an hour of entering the position by selling it at the current premium or market value. Alternatively, you can opt to hold the position for a few minutes or hours.
However, the trade has to occur within the same day to count as a day trade since holding open positions after hours or overnight would just be considered trading or a swing trade.
There is an advantage to day trades, though, because it means your trades are not susceptible to risks posed by overnight news or after-hour broker moves.
Within a 5 trading-day period you can only execute up to 3 trades with intraday trading. That is unless your account holds a portfolio value of a minimum of $25,000 or if you have a cash account.
With a cash brokerage account there is no limit to the number of day trades you can make in a day/week however you can only use the money that has settled to trade with.
Since options settle in one business day you can trade options in a cash account every single day and never have to worry about the PDT rule.
What Counts as a Day Trade
Buying then later selling or selling short then buying the same security thereafter but within the same calendar day is what constitutes a day trade. As such, merely purchasing a security without selling it sometime later on that same day is not considered a day trade.
With options trading, traders often buy many contracts of the same underlying stock simultaneously. To illustrate this, you might buy 12 option calls on a stock, close 6 when the stock price hits your initial profit target, and the rest within the day.
This counts as one day trade and not 12 day trades.
A day trade is per stock or option that you buy and sell and is not based on the number of shares or contracts.
Can You Day Trade Options Without 25K?
You can trade call and put options without $25,000 in your trading account if you execute a maximum of 3 intraday trades within 5 business days if in a margin account. You can have unlimited day trades if your brokerage account is a cash account.
You could also open multiple accounts, thereby receiving additional 3-day trades within a 5-day period per brokerage account. This is only necessary if you are trading on margin though.
The easiest way to day trade options when you have under $25,000 is to open a cash account since the requirement doesn’t apply to cash accounts or limit yourself under the pattern day trader rule.
The $25,000 portfolio value, or the pattern day trader rule, is a requirement instituted by FINRA, The Financial Industry Regulatory Authority. A violation occurs when you execute 4 or more intraday trades in a span of 5 business days with a margin account whose portfolio value falls below $25,000.
While your portfolio’s value might fluctuate beyond the $25,000 in the course of the trading day, your brokerage only considers the previous trading day’s closing balance.
How Many Times Can You Day Trade With $25,000?
If your margin account holds more than $25,000 in equity, then you can day trade as many times as you wish. But only if your margin account remains above $25,000. The $25000 amount can be in cash or a mixture of cash and eligible securities.
The Pattern Day Trader (PDT) Rule places an equity requirement on margin accounts to discourage options traders from trading excessively, thereby exposing themselves to financial ruin. But with 25k in your account, you can execute as many day trades as you like, as noted earlier.
Note that if your margin account goes below the $25,000 equity requirement, you cannot continue day trading options. You’d need to wait until you restore the account to the minimum level or change to a cash account instead.
Why Options Trading Is Attractive to Day Traders
Options trading appeals to traders as a means of making money in the financial markets because they are considerably cheaper than stocks. Options provide high returns while requiring less capital and also provide leverage.
If you don’t have substantial capital or would rather not tie up the amount of capital needed to purchase stock, then buying options might be a more attractive alternative.
Additionally, you benefit from volatility which could potentially earn you considerable profits. Furthermore, with day trading options, there’s less risk from unforeseen events or premium decay since you do not hold positions overnight.
That said, spreads on some options are not that ideal for day trading, which means you could have to spend more when buying the option or get less when selling it.
This is because of the bid/ask spread, whose trading cost tends to be even higher than that of stocks, forex, and futures.
To be successful at day trading, you need experience, as well as extensive knowledge of the market, the trading options available, and the best techniques to use.
Still, with proper trade management, you can be a successful day options trader even with only 3 trades per week (on a margin account).
If you want unlimited option trades then just move to a cash account at your brokerage instead. Then you can trade to your heart’s content.