How Many Options Can You Trade in a Day?

Options contracts provide the right, but not the obligation, to buy or sell an underlying asset at a specified price by a certain date. These financial instruments are commonly used for various purposes, including speculation on price movements, hedging existing positions, or generating income. Active trading, often called day trading, involves frequent buying and selling of securities, including options, within a single trading day. Such rapid transactions are subject to specific regulatory guidelines that govern how many day trades an individual can execute.

Defining a Day Trade in Options

A day trade occurs when an investor opens and subsequently closes a position in the same security within the same trading day. This definition applies broadly to various financial instruments, including options contracts. For example, if an investor buys to open an options contract in the morning and then sells to close that exact same contract before the market closes on the same day, it counts as one day trade. Similarly, selling an options contract to open a position and then buying it back to close within the same trading day also constitutes a day trade. This rule encompasses both long and short positions and includes trading activities that occur during pre-market or post-market hours if they fall within the same calendar trading day. Holding a position overnight, even if sold the next day, is not a day trade.

The Pattern Day Trader Rule Explained

The Financial Industry Regulatory Authority (FINRA) established regulations to oversee frequent trading activity, primarily to mitigate risks associated with excessive leverage. Under the FINRA Pattern Day Trader (PDT) rule, an individual is classified as a pattern day trader if they execute four or more day trades within a rolling five-business-day period. This classification applies if these day trades constitute more than six percent of the total trades in a margin account during that same five-day timeframe.

Once designated as a pattern day trader, the account is subject to a minimum equity requirement. The account must maintain at least $25,000 in equity, which can be a combination of cash and eligible securities, at the close of business on any day day trading occurs. This minimum equity must be present in the account before any day trading activities commence.

If account equity falls below the $25,000 threshold, the pattern day trader is prohibited from further day trades until the account is restored to the required minimum level. This rule limits non-pattern day traders in margin accounts to a maximum of three day trades within any rolling five-business-day period. Brokerage firms are responsible for monitoring and enforcing these regulatory requirements.

Account Types and Trading Limitations

The application of day trading rules varies significantly depending on the type of brokerage account an investor holds. The Pattern Day Trader rule primarily applies to margin accounts, which allow investors to trade with borrowed funds. In contrast, cash accounts are generally not subject to the PDT rule because they require all trades to be fully funded by settled cash.

While cash accounts offer freedom from the PDT rule, they come with their own set of limitations related to the settlement period of funds. For options contracts, transactions typically settle on a T+1 basis, meaning funds from a sale are available for new trades one business day after the transaction date. For stocks and exchange-traded funds, the settlement period is also T+1 as of May 28, 2024.

Using unsettled funds for new purchases in a cash account and then selling those newly purchased securities before the original funds settle can lead to a “good faith violation.” Accumulating multiple good faith violations may result in restrictions, such as a 90-day account freeze limiting trading to settled cash only. Brokers are required to restrict accounts that incur such violations.

Violating the PDT rule in a margin account can lead to a “day trading margin call.” If this call is not met by depositing additional funds within a specified timeframe, typically five business days, the account may face a 90-day trading restriction. During this restriction, the account is generally limited to closing existing positions or trading only on a cash-available basis, effectively preventing further day trading activity.

Managing Day Trading Activity

To navigate the Pattern Day Trader rule, individuals can adopt several approaches. A fundamental practice involves tracking the number of day trades executed within each rolling five-business-day period. Many brokerage platforms offer tools or reports for monitoring this, or a personal log can be maintained.

For those who wish to engage in frequent options trading but do not meet the $25,000 equity requirement for a margin account, a cash account is an alternative. While cash accounts circumvent the PDT rule, it is important to understand and adhere to the settlement period limitations to avoid good faith violations. Ensure funds from a closed trade have fully settled before being used for a new purchase.

Another strategy for investors in margin accounts is to maintain account equity above the $25,000 minimum. This ensures continuous eligibility for day trading without triggering PDT restrictions. If an account falls below this minimum, depositing additional funds promptly can restore day trading privileges.