Do Options Trades Count as Day Trading?

Defining Pattern Day Trading Rules

Day trading involves the frequent buying and selling of securities within the same trading day, subject to specific regulatory oversight by the Financial Industry Regulatory Authority (FINRA). These rules define a “day trade” and identify “pattern day traders” within brokerage accounts, aiming to ensure individuals have sufficient capital and to protect brokerage firms from undue financial exposure.

A “day trade” occurs when an investor opens and then closes the same security position within a single trading session. This applies whether the position is initiated by buying and then selling, or by selling short and then buying to cover. For instance, buying 100 shares of a stock at 10:00 AM and selling them at 2:00 PM on the same day counts as one day trade.

An individual is designated as a “pattern day trader” if they execute four or more day trades within a five-business-day period. This designation applies to accounts that trade securities in a margin account. The five-business-day window is a rolling period, evaluating each new day trade against the previous four business days.

A primary requirement for a pattern day trader is maintaining a minimum equity of $25,000 in their margin account. This equity must be present at the close of business on the previous day for the trader to be eligible to day trade. The $25,000 threshold can be a combination of cash and eligible securities, and must be maintained at all times.

This regulatory framework protects both the individual trader and the brokerage firm. By requiring a significant capital base, FINRA discourages undercapitalized traders from highly speculative activities. For brokerage firms, these rules reduce the risk of clients incurring losses they cannot cover, creating a more stable trading environment.

Options Trades and Day Trading Classification

Options trades are subject to the same day trading rules as stock trades when conducted within a margin account. If an option contract is opened and subsequently closed within the same trading day, it is classified as a day trade. This applies regardless of the option type, strike price, or expiration date. The key determinant is opening and closing the same specific contract within the trading session.

For example, if a trader purchases 10 contracts of XYZ Corporation’s January $50 Call option at 10:30 AM and sells those same 10 contracts at 3:00 PM on the same day, this counts as one day trade. The specific details of the option contract, such as its underlying stock, expiration month, and strike price, must match for the opening and closing positions.

Similarly, trading put options also falls under these day trading classifications. If an investor sells to open 5 contracts of ABC Company’s February $100 Put option at 11:00 AM and then buys to close them at 4:00 PM on the same day, this is also considered one day trade. The direction of the initial trade does not alter its classification if offset on the same day.

The “same security” rule for options applies to the precise options contract being traded. An XYZ January $50 Call is distinct from an XYZ February $50 Call or an XYZ January $55 Call, even with the same underlying stock. Therefore, opening and closing different options contracts on the same underlying stock within the same day would count as separate day trades, provided each individual contract is opened and closed.

Traders frequently engaging in options strategies involving rapid entry and exit within a single day must be mindful of their day trade count and pattern day trader status, particularly when operating within a margin account.

Navigating Pattern Day Trader Requirements

Once an account is designated as a pattern day trader, adherence to the $25,000 minimum equity requirement is necessary. This balance must be maintained in the margin account at the close of business each day to qualify for day trading activity the following day. Failure to meet this threshold results in restrictions on the account’s ability to execute further day trades.

If a pattern day trader’s account equity falls below the $25,000 minimum, the brokerage firm issues a “day trading margin call.” This requires the trader to deposit additional funds or securities to bring the account equity back to the required level. The firm restricts further day trading until the margin call is met, often within five business days. During this period, the trader may only close existing positions or engage in cash-only trades.

Should the day trading margin call not be met, the account may face more severe restrictions. Brokerage firms can prohibit day trading for up to 90 days, or until the call is satisfied. This ensures trading activity aligns with available capital.

Pattern day traders are also subject to specific margin rules that differ from non-pattern day traders. While standard margin accounts require 50% margin for overnight positions, pattern day traders face higher margin requirements for intraday positions. Day trading margin requirements can be as high as 25% of the total value of securities traded. This higher leverage allows for greater trading power but also amplifies potential losses.

Understanding and complying with these requirements is important for any individual designated as a pattern day trader. Continuous monitoring of account equity, awareness of day trade counts, and adherence to margin call deadlines are necessary. These regulatory constraints ensure traders operate with adequate financial backing.