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If you’re a skilled investor and enjoy playing the stock market, then you know you must also follow all rules and guidelines created by the stocks & bonds regulations. However, what about call/put options?
Do they fall under the same category as other day trading moves?
Call/put options have to follow PDT rules just like stocks. If you trade more than four days in a row, you’ll be labeled as PDT regardless of whether you are trading stocks or options. However, call/put options settle overnight, meaning you can avoid the PDT rules if you just have a cash account.
In order to gain a better understanding of this situation, please continue reading this article. I hope you’ll enjoy the insights shared and that you walk away knowing all about call/put options, rules, and PDT guidelines.
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Understanding The PDT Rule In Call/Put Options
Let’s break it down by understanding why call/put options have to follow PDT rules in the first place. In order to clearly understand this issue, it’s best to understand the definition thoroughly.
First of all, PDT stands for “Pattern Day Trader,” and it involves trading stock or options on the same business day.
Well, if you trade options in a cash account in one day, you won’t be designated as a PDT. So, no need to worry about following PDT rules if you’re buying and selling your call/put options in a single day with that kind of accounts
Keep in mind the next time you open and close your options in just a single day, or in less than four days in a row, that you will not be penalized for potentially breaking any PDT rules as long as you have a cash account or over $25,000 in a margin account.
If you have under $25,000 of equity and have a margin account when you day trade over four days in a row, then you’ll be labeled as a PDT no matter how you negotiate with your call/put options.
Call/put options are viewed as the same as any other type of trading you do with your stocks. Therefore, they fall under the same category as all other components.
Reasons The PDT Rule Exists
Day trading is considered riskier than other trading/investing strategies, which explains why the PDT rule exists. The rule is meant to protect new investors, who are typically inexperienced, from day trading risks.
It can also discourage people from day trading.
Now, what does it take for an investor to be considered inexperienced? The answer is traders with equity less than $25,000 and that have a margin account.
While the PDT rule intends to protect inexperienced investors, many investors don’t like it, so they usually find ways to bypass the rule.
The simplest way to avoid breaking these rule is having a cash brokerage account. With a cash account you don’t have to have a minimum amount and can trade as much as you want. Since options clear in one business day you can turn over your entire account every single day if you want to.
What Happens If You Violate The PDT Rules?
So what exactly happens if you violate the PDT rules for your call/put options?
This also follows the same principles as everything else involved with your day and weekly trading.
You may be penalized if you violate PDT rules. The rules apply if you’re considered a PDT who’s trading more than four days in a row but don’t have the equity (over $25,000) or don’t have a cash account.
If this happens, your account could be flagged. Speak with a professional who deals with call/put options to find out what exactly you should do from this point.
Call/Put Options Settle Overnight Unlike Other Trades
There is a fantastic element to call/put options that aren’t available for other day trading.
This feature will help you avoid PDT rules. Awesome, right?
If you use a cash account, you must wait two days for everything to settle if you no longer have any cash to use.
However, for call/put options, things are a little different and to your advantage. This is good news for you!
These trades settle overnight, meaning once the next trading day begins, those call/put options have been fully processed.
If you have under $25,000 in your account, you can buy and sell options as much as you want due to the policy mentioned above as long as you have a cash account.
So do not worry too much about following the rules precisely, because you can circumvent them due to them being completed by the next working day.
Day Trade Rules Apply to Options
Now that we’ve established call/put options and how they relate to the PDT rules and how to navigate around being penalized, I’ll discuss if day trade rules apply to options.
Day trade rules, meaning buying and selling stocks every day, do apply to anything you sell or buy, which includes options.
As mentioned earlier, day trading must not exceed four days in order for it not to break any PDT rules. Otherwise, you’ll be labeled as such.
Firms will give out a day-trading margin call for any traders who do unfortunately overstep any guidelines.
If you day trade and have under $25,000 in equity in a margin account, you want to pay particular attention to how often you buy and sell daily. If you are aware of your trading and heed all warning signs, then you should be good to go.
You Can Bypass The PDT Rule If You’re a Call/Put Options Trader
Can you find ways to get past the PDT rules in order to avoid being dinged on your account?
Sure! You definitely can. There are several ways but let’s discuss one method just as an example.
One way in which you can do this is to spread out your call/put options on your calendar, so you space out the buying and selling.
Since there are options with different expiration dates ranging from anywhere between 6 and 8 dates. You can play around with these dates only if you believe the market will stay the same throughout this period of time.
So, try this out and see if it works for you. I’m sure you’ll manage just fine.
Call/put options are subject to the same PDT rules as another type of day trading.
They don’t have much of a difference, but for the fact that they do settle within one day. You can certainly use this to your advantage to prevent yourself from being labeled as an account that doesn’t abide by rules or regulations.
Keep in mind that you can definitely avoid breaking the PDT rules, and doing so will benefit you as a successful trader and a person who manages their accounts well.
Good luck with your call/put options trading!