Generating day trading margin calls
The world of day trading can be unlike any other trading you may do because you only hold your securities for a day. If you think day trading may be for you, it’s important to understand the process so you'll be prepared if you decide to place this type of trade.
Using proceeds from the sale of overnight positions
One of the most common ways customers generate day trading margin calls is by closing out an existing position held overnight and then day trading on the proceeds. In general, an account which is not in aggregation and has no overnight positions has a much smaller likelihood of generating a day trading (DT) call. An aggregation status means the total cost of all day trades in one day cannot exceed your starting day trading buying power (DTBP).
When you close a position, your option buying power (BP) and stock buying power will increase. It is important to note that your starting DTBP does not increase because it can never increase intraday.
While it is acceptable to use the proceeds from a closing transaction to enter into a new opening transaction, it is not acceptable to use the proceeds to day trade because you are not permitted to exceed your starting DTBP when day trading.
Let’s look at a few examples beginning with how aggregation works:
A pattern day trader account begins the day with margin equity of $1,500 and starting DTBP of $1,500. The account has a prior open, not yet past due, DT call.
Trade 1 (9 a.m.)—Buy 50 ZZZ $55 ($2,750)
Trade 2 (10:15 a.m.)—Sell 50 ZZZ $56. Option BP increases to $3,050.
Trade 3 (11 a.m.)—Buy 100 XYZ $29 ($2,900)
Trade 4 (1:15 p.m.)—Sell 100 XYZ $29
While neither trade individually exceeded starting DTBP, the fact that this account is in aggregation means that you must total up all day trade requirements. The total of the two day trades is $2,750 + $2,900 = $5,650. This amount exceeds the starting DTBP by $4,150, and a day trading margin call will be issued for this amount.
Option BP is $3,000. DTBP is $3,000.
Customer has a long overnight position of 50 XYZ Jan 50 calls with a market value of $5,000.
Trade 1 (8:35 a.m.)—Sell to close (STC) 50 XYZ Jan 50 calls $1.10. Option BP increases to $8,500.
Trade 2 (9 a.m.)—Buy to open (BTO) 100 ZZZ Feb 35 calls $0.75 ($7,500)
Trade 3 (11 a.m.)—STC 100 ZZZ Feb 35 calls $0.80 ($8,000)
The customer day traded the ZZZ options. The day trade charge is the requirement for the opening trade, or $7,500. He exceeded his starting DTBP by $4,500 and a DT call will be issued for this amount.
Option BP is $2,500. DTBP is $2,500.
Customer has an overnight position consisting of 10 five-point credit spreads, with a requirement of $5,000.
Long 10 XYZ 50 puts $0.40/short 10 XYZ 55 puts $1.00
Trade 1 (10 a.m.)—The customer buys in the spread, spending $600. His option BP increases to $6,900.
Trade 2 (10:30 a.m.)—BTO 15 ZZZ April 40 puts $0.20/STO 15 ZZZ April 45 puts $0.60 ($0.40 credit)
The requirement for this trade is $6,900.
Trade 3 (1:30 p.m.)—STC 15 ZZZ April 40 puts $0.25/BTC 15 ZZZ April 45 puts $0.75.
The customer day traded the credit spread. The requirement for the opening transaction is $6,900. He has exceeded his starting DTBP by $4,400 and a DT call will be issued to the customer for this amount.
Using profits for day trading
A customer who is not in aggregation and who comes into the day with no overnight positions has a much smaller likelihood of generating a DT call. One way to cause a DT call is to day trade using profits.
A customer comes into the day with $25,000 of starting DTBP and no positions.
Trade 1 (8:45 a.m.)—BTO 100 ZZZ Feb 450 calls $2.00 ($20,000)
Trade 2 (11:30 a.m.)—STC 100 ZZZ Feb 450 calls $3.00. Profit of $10,000. Option BP increases to $35,000.
Trade 3 (1:30 p.m.)—BTO 200 XYZ March 60 calls $1.50 ($30,000)
Trade 4 (2:45 p.m.)—STC 200 XYZ March 60 calls $1.50
The customer’s highest open position in requirements is Trade 3, when he spends $30,000. This amount, partially made by using intraday profits from his original day trade, exceeds his starting DTBP by $5,000, and a DT call will be issued to the customer for this amount.
Using same day deposits for day trading
Funds available for day trading must be in the margin account one business day prior to calculating the DTBP. DTBP refers to the equity in the account at the close of business on the previous business day, less any maintenance requirements, multiplied by four (for equity securities).
Any funds brought into the account the same day, such as a wire deposit for instance, cannot be used for day trading.
New customer has no positions and no buying power to start the day. He wires in $50,000 at noon. The wire is posted to his account, and his option BP is now $50,000.
Trade 1 (1 p.m.)—BTO 100 XYZ March 400 calls $3.00 ($30,000)
Trade 2 (1:10 p.m.)—BTO 50 QQQ April 50 calls $2.50 ($12,500)
Trade 3 (2:45 p.m.)—STC 100 XYZ March 400 calls $3.25
The customer has day traded the XYZ options. The day trade charge is $30,000. This figure exceeds his starting DTBP ($0) and a DT call will be issued to the customer in the amount of $30,000.
Avoiding day trading calls
There may be times you need to manage your day trading and avoid DT calls. Here are a few tips and recommendations to help:
- Pay attention to your DTBP number at the start of the day.
- Day trading and position trading at the same time makes a trader more susceptible to generating DT calls. The number one cause of DT calls is day trading on the proceeds from closing overnight positions. In general, a customer who is not in aggregation and who comes into the day with no overnight positions has a much smaller likelihood of generating a DT call.
- If you plan to day trade, disable the money market sweep. Money market funds may not be used by pattern day traders to satisfy DTBP requirements.
- When day trading spreads, enter into the trade and close out of the trade at the same time. Closing spreads with multiple orders will increase the day trade charge.
- Be aware of the rules for day trading naked options.