Do Options Count as Day Trades for PDT Rules?

Options trading and day trading are distinct approaches in financial markets. Options contracts provide the right, but not the obligation, to buy or sell an underlying asset at a set price by a certain date. Day trading involves rapidly buying and selling securities within the same trading day, aiming to profit from short-term price fluctuations. Understanding how options transactions are treated under day trading rules is important for market participants.

Understanding Day Trading Rules

A “day trade” is defined by regulatory bodies, such as FINRA, as the purchasing and selling, or selling and purchasing, of the same security within the same trading day in a margin account. This encompasses both long and short positions, meaning buying to open and selling to close, or selling short to open and buying to cover, on the same day are considered day trades.

A “Pattern Day Trader” (PDT) is a regulatory designation for frequent day trading. An individual is classified as a PDT if they execute four or more day trades within any five consecutive business days. These trades must also represent over six percent of the customer’s total trades in their margin account during that period. This designation primarily applies to margin accounts.

Brokerage firms monitor trading activity and designate customers as pattern day traders if these criteria are met. Firms can also designate a customer as a PDT if they believe the customer will engage in pattern day trading. Once flagged, an account typically retains this designation, even if day trading activity ceases.

The count of day trades is based on a rolling five-business-day period, not a fixed calendar week. Each new trading day, the oldest day of the five-day window drops off, and the new day is added. Brokerage firms employ systems to track these trades and apply the PDT designation automatically when thresholds are crossed.

Applying Day Trading Rules to Options

Options contracts are included under the definition of “securities” for day trading rules. Opening an options position and then closing it within the same trading day in a margin account counts as a day trade, similar to stock transactions. For instance, buying a call option and selling it later that day, or selling a put option and buying it back before market close, each constitutes one day trade.

When engaging in multi-leg options strategies, such as spreads, treatment for day trading purposes can vary depending on the brokerage firm’s interpretation and how orders are executed. Some firms may consider each individual leg of a multi-leg strategy, like an iron condor, as a separate trade if each leg is opened and closed intraday. Under this interpretation, closing an iron condor opened on the same day could count as four day trades.

Conversely, some brokerages may treat an entire multi-leg strategy as a single day trade if it is opened and closed as one cohesive strategy. If a trader opens a spread and then closes the entire spread with a single order on the same day, it might be counted as one day trade. However, if individual legs are traded or closed independently on the same day, they could be counted as separate day trades. Traders should confirm their brokerage’s specific policy regarding multi-leg options and day trade counting.

If an options contract is bought on one day and sold on a subsequent day, it does not count as a day trade. Only transactions where the opening and closing of the same security position occur within the same trading session are considered day trades.

Consequences of Pattern Day Trader Status

Pattern Day Trader (PDT) designation carries specific regulatory requirements and restrictions, primarily within margin accounts. A primary consequence is the mandatory minimum equity requirement of $25,000, which must be maintained in the margin account on any day the customer engages in day trading. This equity can comprise cash and eligible securities, and must be present before any day trading activities commence.

If a pattern day trader’s account equity falls below the $25,000 minimum requirement, based on the previous business day’s close, the trader is prohibited from engaging in further day trades. The account will remain restricted until the equity is restored to or above the $25,000 threshold. Failure to meet this equity requirement can lead to the account being restricted to closing transactions only, meaning the trader can sell existing positions but cannot open new ones.

Pattern day traders are also subject to rules concerning “day-trading buying power.” This refers to the maximum amount of money a PDT can use for day trades. Generally, a pattern day trader’s buying power for equity securities is limited to four times the maintenance margin excess as of the close of business of the prior day. If a trader exceeds this limit, the brokerage firm will issue a day trading margin call.

Should a day trading margin call be issued, the trader typically has a limited period, often up to five business days, to deposit additional funds to meet the call. While the margin call is outstanding, the account’s day-trading buying power may be reduced, commonly to two times the maintenance margin excess. If the margin call is not met by the deadline, the account can be further restricted, potentially limited to trading only on a cash available basis for 90 days, or until the call is satisfied.

Managing Day Trading Status

Traders can manage their day trading activity to avoid unintended Pattern Day Trader (PDT) designation. Tracking the number of day trades executed within the rolling five-business-day period is a fundamental step. This helps traders stay aware of their current day trade count relative to the four-trade limit. The five-day window constantly shifts with each new business day.

Different account types can also influence PDT status. Pattern day trading rules exclusively apply to margin accounts, which allow traders to borrow funds from their brokerage. In contrast, cash accounts are not subject to the PDT rule. In a cash account, a trader can make an unlimited number of day trades, provided they trade with settled funds.

Trading in a cash account introduces its own considerations, primarily related to settlement periods. Most securities transactions, including options, typically settle on a “trade date plus one business day” (T+1) basis. This means funds from a sale are not available for reuse until the next business day. Attempting to buy and sell a security using unsettled funds in a cash account can lead to a “good faith violation.” Accumulating three good faith violations within a 12-month period can result in the account being restricted to trading only with settled cash for 90 days.

Some traders choose to manage their day trade count by holding positions overnight, even if their initial intention was to close them the same day. This avoids the day trade classification, though it introduces overnight market risk. Another approach involves opening multiple brokerage accounts, allowing a trader to execute a limited number of day trades in each account without triggering the PDT rule in any single one, provided the $25,000 equity requirement is met if applicable.