Do Options Trades Count as Day Trades?

Understanding trading regulations is important for active financial market participants. Misinterpreting day trade rules can lead to unforeseen account restrictions. A clear grasp of regulatory definitions and their practical application is needed to navigate these complexities.

Defining a Day Trade

A day trade, as defined by the Financial Industry Regulatory Authority (FINRA), involves the purchase and sale, or the sale and purchase, of the same security within the same trading day in a margin account. This “round trip” trade signifies opening and closing a position within a single market session. The definition applies to various securities, including stocks and options, and encompasses both long and short positions. For instance, buying shares at 10:00 AM and selling them at 2:00 PM on the same day qualifies as one day trade.

A trading day refers to the period from market open to market close. Trades executed outside of regular market hours, such as during pre-market or after-hours sessions, are included in the trading day for which they are cleared. Holding a position overnight, even briefly into the next trading day, prevents it from being classified as a day trade.

How Options Trades Count as Day Trades

Options trades are subject to the same day trading rules as other securities. When an individual opens a position by buying an option contract and then closes that same contract by selling it on the same trading day, this constitutes a single day trade. This applies to both call and put options, provided the underlying asset, strike price, and expiration date are identical for the opening and closing transactions. Selling to open an option and then buying to close that specific contract within the same day also counts as one day trade.

Different option contracts, even on the same underlying stock, are not considered the “same security” for day trade counting. For example, opening and closing a call option, then opening and closing a different call option with a different strike price or expiration on the same underlying asset, counts as two separate day trades.

The exercise or assignment of an option can also lead to a day trade if the resulting position in the underlying security is closed on the same day. For example, if a call option is exercised and the resulting shares are immediately sold, this action results in a day trade involving the stock. If a put option is assigned and the resulting shares are purchased and then sold on the same day, this also counts as a day trade. For multi-leg options strategies, such as spreads, each individual leg is treated as a separate transaction for day trade counting, not the entire strategy as a single unit.

The Pattern Day Trader Rule Explained

The Financial Industry Regulatory Authority (FINRA) established the Pattern Day Trader (PDT) rule to regulate frequent day trading activity, primarily in margin accounts. Under FINRA Rule 4210, an individual is designated as a pattern day trader if they execute four or more day trades within a rolling period of five business days. This designation also requires that day trades represent more than six percent of the customer’s total trading activity in their margin account during that five-day period.

Pattern day traders must maintain a minimum equity balance of $25,000 in their margin account at all times. This equity can include cash and eligible securities, and it must be present before any day trading activity commences. If an account falls below this threshold, the pattern day trader will face restrictions, prohibiting further day trading until the minimum equity is restored. Consequences can include limitations on day trading buying power or the account being restricted to cash-available trading for 90 days.

The PDT rule applies to margin accounts, which allow traders to borrow funds from their brokerage. Cash accounts, while not subject to the PDT rule, have limitations related to settlement periods. Stock trades in a cash account settle in two business days (T+2), meaning funds from a sale are not immediately available for new purchases. Options trades settle in one business day (T+1), which provides faster access to funds.

Strategies for Managing Day Trade Counts

Managing day trade counts is important for active traders to avoid unintended restrictions under the Pattern Day Trader rule. Track all opening and closing positions within a trading day. Many brokerage platforms offer tools and reports to monitor day trades executed. Maintaining a personal log or spreadsheet can also provide a clear overview of trading activity within the rolling five-business-day window.

A strategy to avoid a day trade classification is to hold positions overnight. Keeping an open position for at least one night, even if sold shortly after market open the next day, will not count as a day trade. This method allows traders to participate in short-term market movements without triggering the day trade definition. However, holding positions overnight introduces overnight market risk.

Utilizing a cash account instead of a margin account is another consideration. While cash accounts are not subject to the Pattern Day Trader rule, they are limited by settlement periods. Funds from stock sales take two business days to settle, meaning those funds cannot be used for new purchases until settlement is complete. Options trades settle in one business day, which offers more flexibility in a cash account. Understanding and adhering to these settlement cycles is important when using a cash account for frequent trading.

Traders should be aware of the five-business-day rolling window FINRA uses to assess day trading activity. Day trades from the current day, along with the previous four business days, are continuously evaluated. Monitoring this period allows traders to adjust their activity, such as reducing same-day trades, to remain below the pattern day trader threshold. Review your brokerage firm’s specific day trading policies, as some firms may have more conservative internal policies.