Day trading requirements at E*TRADE

E*TRADE Securities2

10/12/17

Whether you are interested in long stocks, spreads, or even naked options, there are several requirements that are important for you to be aware of before you get started. Knowing these requirements will help you make the right day trading decisions for your strategy.     

 

Long stock

E*TRADE allows for 4x the day trading buying power for regular marginable securities.  However, some stocks may have higher requirements.

Long stock example:

A customer starts with $40,000 of day trading buying power and can day trade up to $40,000 of regular marginable securities.

 

Spreads

When day trading, spreads must be opened and closed as a spread to qualify for spread treatment. Opening a spread and closing the legs individually, will change the day trade requirements.

Spreads example 1:

Here is an example of the credit spread closed at once:

Trade 1 (9 a.m.): Buy to open (BTO) 10 XYZ Feb 60 calls $2.30/Sell to open (STO) 10 XYZ Feb 55 calls $3.75 ($1.45 credit)

Trade 2 (10:15 a.m.):  Sell to close (STC) 10 XYZ Feb 60 calls/Buy to close (BTC 10) XYZ Feb 55 calls

Since this credit spread was entered into and closed at the same time, the day trade requirement is the difference between the strike less the credit taken times the volume or $3,550.

(($60 – $55) – $1.45) * (10 * 100) = $3,550

 

Spreads example 2:

Here is an example of the credit spread legs being closed individually:

Trade 1 (9 a.m.): BTO 10 XYZ Feb 60 calls $2.30/STO 10 XYZ Feb 55 calls $3.75 ($1.45 credit).
Trade 2 (10:15 a.m.): BTC 10 XYZ Feb 55 calls
Trade 3 (11 a.m.): STC 10 XYZ Feb 60 calls

The day trade requirement will be the premium of the long and short opening trades added together. In this case, the day trade charge will be $2,300 + $3,750 = $6,050.

 

Condor Spreads example 1:

Trade 1 (10 a.m.): BTO 10 ZZZ Jan 150 calls $1.50/STO 10 ZZZ Jan 140 calls $6.50/BTO 10 ZZZ Jan 120 puts $0.75/STO 10 ZZZ Jan 130 puts $2.25. ($6.50 credit)

Trade 2 (2:30 p.m.): Close the condor in one spread order

Because the condor was entered into and closed at the same time, the requirement for this trade is identical to exchange requirements, which is $3,500. This is the difference if the trade is closed with two separate orders.

 

Condor Spreads example 2:

Trade 1 (10 a.m.): BTO 10 ZZZ Jan 150 calls $1.50/STO 10 ZZZ Jan 140 calls $6.50/BTO 10 ZZZ Jan 120 puts $0.75/STO 10 ZZZ Jan 130 puts $2.25. ($6.50 credit)

Trade 2 (12 p.m.): STC 10 ZZZ Jan 150 calls/BTC 10 ZZ Jan 140 calls
Trade 3 (2 p.m.): STC 10 ZZZ Jan 120 puts/BTC 10 ZZZ Jan 130 puts

In this case, both sides of the condor will have a day trade requirement. The day trade charge in this example is $5,000 for the call side and $8,500 for the put side, or a total of $13,500.

Note: Butterflies and other multi-leg orders are treated in the same manner.

Triple leverage (3X) ETFs have margin requirements of 75% for long purchases and 90% for short sales. A customer with $40,000 of starting day trading buying power can purchase and day trade up to $13,333 of a long 3X ETF ($10,000/.75) and sell and day trade up to $11,111 of a short 3X ETF ($10,000/.90).

 

Naked options

The margin requirements for day trading naked options are very different from those of other strategies, especially day trading strangles and straddles. These two strategies are not currently recognized by FINRA as bona fide spreads when it comes to day trading. Both the put and the call side of a strangle will have a day trade charge and the price used for the underlying stock is the closing price of the previous business day, not the price at the time of the trade.

 

Single naked option example:

Trade 1 (10 a.m.): STO 25 XYZ Dec 60 calls $2.50 (current stock price 58. Stock price at the close of previous business day is 60)

The charge against overnight buying power for entering into this trade is $31,250.

25 * 100 * (20% of closing stock price ($60.00) + premium ($2.50) – Out of the money amount ($2.00)) = $31,250

Trade 2 (12 p.m.): BTC 25 XYZ Dec 60 calls

The customer has now day traded the naked options. The price of the underlying used in the calculation is now 60, not 58. The day trade requirement is now $37,500. This is a difference of $6,250 from the exchange requirement shown above.

 

Strangle example 1:

Trade 1 (8:33 a.m.): STO 20 XYZ April 150 calls $1.50/STO 20 XYZ April 130 puts $1.25. Current stock price is 140. Stock price at the close of the previous business day is $142.50.

The charge against overnight buying power for this strangle is $50,500.

Trade 2 (1:50 p.m.): BTC the strangle

The price of the underlying securities used in the calculation is now 142.50, not 140, and each side of the strangle, both put and call, has a day trade requirement.

The day trade margin requirement for this strangle is $102,500. This is a difference of $52,000 from the exchange requirement shown above.

 

Strangle example 2:

A customer comes into the day with $10,000 of starting day trading buying power and a short position of 50 XYZ March 40 calls ($2.30). XYZ closed at 38 the previous night. The requirement for this position is $49,000.

Trade 1 (9:15 a.m.): STO 50 XYZ March 35 puts $1.00. Stock price remains 38.

This trade is paired against the short call position and the exchange requirement to place this trade is the premium of the puts or $5,000. The customer does not need to put up any additional funds as the $5,000 in proceeds are applied to the trade.

Trade 2 (11:45 a.m.): BTC 50 XYZ March 35 puts

The customer has day traded the puts. The requirement for this trade is $32,500 and a day trade call in the amount of $22,500 will be issued to the customer.

 

From long stocks, to spreads, to naked options, E*TRADE can help you learn more about the best strategy to use for your day trade. Visit us today at www.etrade.com.