Does the PDT Rule Apply to Options?
Understand how critical trading regulations apply to specific financial instruments, affecting your approach to frequent market activity.
Financial markets operate under regulations designed to protect participants and foster stability. These rules manage risks from frequent trading, especially for individual investors, by establishing guidelines for transparent markets and addressing capital requirements.
Understanding the Pattern Day Trader Rule
The Financial Industry Regulatory Authority (FINRA) introduced the Pattern Day Trader (PDT) rule, specifically FINRA Rule 4210, to regulate frequent trading in margin accounts. This rule defines what constitutes a “day trade” and sets criteria for designating an account as a pattern day trader. A day trade involves the buying and selling, or selling short and buying to cover, the same security within the same trading day in a margin account.
An individual is designated a pattern day trader if they execute four or more day trades within any five consecutive business days. These day trades must also account for more than six percent of the total trades in the margin account during that five-day period. Once designated, a pattern day trader is required to maintain a minimum equity of $25,000 in their margin account. This equity must be present before any day-trading activities commence.
Applying the Rule to Options Trading
The Pattern Day Trader rule applies to options trading, treating options contracts as securities for the purpose of day trade counting. Buying to open an options contract and then selling to close that same contract within the same trading day counts as one day trade. Similarly, selling to open an options contract and subsequently buying to close it on the same day also constitutes a single day trade. This applies to the identical contract, meaning the same underlying asset, strike price, expiration date, and number of contracts.
For options strategies, the specific legs of a trade determine how they are counted under the rule. For example, purchasing a call option and selling it later on the same day is considered one day trade. However, if an investor buys a call and then sells a different call—one with a different strike price or expiration date—these are typically not considered a single day trade for PDT purposes, but rather two separate positions. Brokerage firms may have specific interpretations, but the general principle is that a “round trip” on the same contract within the same day triggers a day trade count.
Implications of Pattern Day Trader Status
This requirement ensures that the account has sufficient capital to manage the increased risks associated with frequent trading. If the account’s equity falls below this $25,000 threshold, the pattern day trader is prohibited from engaging in further day trades until the account balance is restored.
Should a pattern day trader exceed their day-trading buying power, a “day trade call” will be issued. The trader typically has up to five business days to deposit additional funds to meet this call. During this period, the account’s day-trading buying power may be restricted. If the day trade call is not met by the deadline, the account can face further restrictions, such as being limited to trading only on a cash available basis for a period, often 90 days, or until the call is satisfied. In severe instances, accounts that fail to meet these requirements may be subject to freezing or liquidation of positions to cover deficiencies.