How Many Options Trades Per Day Are You Allowed to Make?

Options trading offers a flexible way to participate in financial markets. Understanding the permissible frequency of trades is important, as specific regulations and account considerations influence how often one can engage in options transactions.

Pattern Day Trader Rule

The Financial Industry Regulatory Authority (FINRA) established the Pattern Day Trader (PDT) rule (FINRA Rule 4210) to regulate frequent trading in margin accounts. This rule applies to any security, including options, stocks, and futures. An individual is classified as a “pattern day trader” if they execute four or more “day trades” within five business days in a margin account. The number of day trades must also constitute more than six percent of the total trades in that account during the five-business-day period.

Pattern day traders must maintain a minimum equity of $25,000 in the margin account at all times. This minimum must be present in the account before any day trading activities commence. If the account’s equity falls below this $25,000 threshold, the pattern day trader will be restricted from further day trading until the account is restored to the minimum level.

Failure to meet a day trading margin call within five business days can lead to a 90-day restriction, during which the account is limited to trading only on a cash available basis. FINRA Rule 4210, along with SEC Rule 15c3-1 (the Net Capital Rule), aims to ensure that brokerage firms and their customers maintain sufficient capital to meet financial obligations and manage risk. While the $25,000 minimum is a baseline, some brokerages may impose higher requirements.

Defining and Counting Day Trades

A “day trade” is defined as the purchase and sale, or sale and purchase, of the same security within the same trading day in a margin account. This definition applies to various securities, including options contracts. For example, if an options contract is bought in the morning and sold later that same afternoon, it constitutes one day trade.

Conversely, if a position is opened on one trading day and then closed on a subsequent day, it is not considered a day trade. The rule also applies to short selling, where selling an option short and buying it back on the same day is counted as a day trade.

For counting purposes, multiple trades of the same security within a single day count as one day trade. For instance, buying an options contract, selling part of it, then buying more, and finally selling the remaining portion, all within the same day, is considered a single day trade for that specific security. If different securities are traded in this manner, each is counted individually.

Account Types and Trading Frequency

The rules governing trading frequency differ between margin accounts and cash accounts. The Pattern Day Trader rule applies exclusively to margin accounts, which permit borrowing funds from the brokerage for trading. In a margin account, exceeding the four day trades in five business days threshold triggers the $25,000 minimum equity requirement.

The Pattern Day Trader rule does not apply to cash accounts. However, cash accounts are subject to different regulations concerning “good faith violations” and “free riding.” A good faith violation occurs when an investor buys a security with unsettled funds and then sells that security before the initial purchase has fully settled.

The standard settlement period for most securities, including stocks and options, is T+1, meaning trades settle one business day after the transaction date. If an investor in a cash account sells an option and uses the unsettled proceeds from that sale to immediately buy another option, then sells the second option before the first sale’s proceeds settle, it could lead to a good faith violation. Repeated good faith violations, such as three violations within a 12-month period, can result in a 90-day restriction where the account can only trade with settled funds. A “free riding” violation, which occurs when an investor buys and sells a security without ever having the capital to cover the initial purchase, can lead to a 90-day account freeze after one instance.

Brokerage Specific Requirements

While FINRA establishes baseline regulations for trading frequency, individual brokerage firms have discretion to implement their own additional requirements. These policies can affect how many options trades an individual can make. Some brokers may impose higher minimum equity requirements for pattern day traders than the $25,000 mandated by FINRA.

Brokerages may also have stricter internal policies regarding cash account violations, potentially leading to restrictions more quickly than general regulatory guidelines. These firm-specific rules are designed to manage risk based on the broker’s assessment and operational capabilities. Traders should review their specific brokerage’s terms and conditions or contact their broker directly for current information regarding their account’s trading limitations and requirements.