Day-Trading Margin Requirements: Know the Rules

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The basic fundamentals of options trading are relatively easy to learn, but this is a very complex subject once you get into the more advanced aspects. As such it's no surprise that there is a fair amount of terminology and jargon involved that you may not be familiar with.

We have compiled this comprehensive glossary of terms to be a useful reference tool for anyone learning about trading options. Although we always try and explain option trading for day traders used terminology we use in the context that we are using it in any particular page or article we write, there may be occasions when you come across a term that you don't understand.

This glossary of terms is here to be used if you ever require an explanation for what a particular word or phrase means. This is an advanced strategy that can be used to profit from an underlying security remaining neutral. Learn how to use an Albatross Spread.

All Or None Order: Often abbreviated as AON, this is a type of order that must be either filled entirely or not at all. A contract that gives the holder the flexibility of choosing to exercise their option at any point between buying the contract and the contract expiring. More on American Style. Taking advantage of price discrepancies by buying and selling to create option trading for day traders used risk free trade. Strategies that involve the use of arbitrage.

Read more at Arbitrage Strategies. When the writer of a contract is required to fulfill their obligations under the terms of that contract — for example buying the underlying security if they have written calls or selling the underlying security if they have written puts. The writer will be issued with an assignment notice in such circumstances. At the Money Option: An option where the price of the underlying security is the same as the strike price. The process by which in the money options are automatically exercised if they are in the money at the point of expiration.

A trading method that involves using a third party to select your trades and having your broker automatically execute them. Read more on Auto Trading. A type of option that is based on a group of option trading for day traders used securities option trading for day traders used than just one. A type of option that can come into existence or go out of existence based on specific criteria is usually related to the price option trading for day traders used the underlying security.

More about Barrier Options. This is an advanced strategy that can be used when the outlook of an underlying security is bearish. Learn how to use a Bear Butterfly Spread. A simple strategy, using calls, that can be used when the expectation is that the underlying security will decline in price. Learn how to use a Bear Call Spread. An expectation that an option, or any financial instrument, will decrease in price. Option trading for day traders used that can be used to profit from a downward move in the price of a financial instrument.

List of Bearish Strategies. Bear Put Ladder Spread: This is an advanced strategy that can be used when the outlook on an underlying security is bearish. Learn how to use a Bear Put Ladder Spread. A simple strategy using puts that can be used when the expectation is that the underlying security will decline in price. Learn how to use a Bear Put Spread. This is a strategy that can be used when the outlook on an underlying security is bearish. Learn how to use a Bear Ratio Spread.

An unconfirmed market movement which suggests a bear market, but is unconfirmed and ends up with the market moving upwards. The difference between the bid price and the ask price of an option. An indicator of liquidity, and often referred to simply as the spread. A type of option that pays a fixed return if it expires in the money or nothing if it expires at the money or out of the money. More about Binary Options. Binomial Options Pricing Model: Read more about the Binomial Pricing Model.

Black Scholes Options Pricing Model: A pricing model that is based on factors that include the strike price, the price of the underlying security, the length of time until expiration, and volatility. Read about the Black Scholes Pricing Model. The price or price range of the underlying security at which a strategy will option trading for day traders used even, with no profits and no losses.

When the price of a security moves above an existing resistance level or below an existing support level. The expectation is that the security will continue to move in the prevailing direction. An individual or a company that executes orders to buy and sell financial instruments on behalf of clients.

The charge from a broker for executing orders on behalf of clients. This is a strategy that can be used when the outlook on an underlying security is bullish. Learn how to use option trading for day traders used Bull Butterfly Spread. Bull Call Ladder Spread: Learn how to use a Bull Call Ladder Spread.

A simple strategy, involving calls, which can be used when the expectation is that the underlying security will increase in price. Learn how to use a Bull Call Spread. This is an advanced strategy that can be used when the outlook on an underlying security is bullish.

Learn how to use a Bull Condor Spread. An expectation that an option, or any financial instrument, will increase in price. Strategies that can be used to profit from an upward move in the price of a financial instrument.

List of Bullish Strategies. A simple strategy, involving puts, which can be used when the expectation is that the underlying security will increase in price. Learn how to use a Bull Put Spread. An unconfirmed market movement which suggests a bull market, but is unconfirmed and ends up with the market moving downward. Learn how to use a Butterfly Spread. Buy to Close Order: An order that is placed when you want to close an existing short position through buying contracts that you have previously written.

Read more about the Buy to Close Order. Buy To Open Order: An order that is placed when you want to open a new position through buying contracts. Read more about the Buy to Open Order. This is a simple strategy that can be used to profit from an underlying security remaining neutral. Also known as a Time Call Spread. Learn how to use a Calendar Call Spread. Also known as a Time Put Spread. Learn how to use a Calendar Put Spread. A type of spread that is created using multiple contracts with different expiration dates.

Also referred to as a time spread. Read more about Calendar Spreads. Learn how to use a Option trading for day traders used Straddle. Learn how to use a Calendar Strangle. The process that takes place when the writer of calls is required to fulfill their obligation and sell the underlying security at the agreed strike price. A type of option which grants the holder the right, but not the obligation, to option trading for day traders used the relevant underlying security at an agreed strike price.

Read more about Calls. An advanced strategy that can be used for profit in a volatile market, when there is a bullish outlook. Learn how to use a Call Ratio Backspread. Learn how to use a Call Ratio Spread. The implied cost of using capital to purchase financial instruments based on interest incurred from borrowing that capital or interest lost from taking that capital from an interest bearing account. A type of option in which any profits due to the holder at the point of exercise or expiration are paid in cash rather than an underlying security being transacted.

Read more about Cash Settled Options. Tables that are used to show various information related to specific options. Read more about Chains. A type of option that allows the holder to choose whether it's a call or a put at some point during the term of the contract. The point at the end of a trading day when the market closes and final prices are calculated. An order which is used to close an existing position. Option trading for day traders used type of order that combines multiple orders into one.

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The required minimum equity must be in the account prior to any day-trading activities. The rules permit a pattern day trader to trade up to four times the maintenance margin excess in the account as of the close of business of the previous day.

If a pattern day trader exceeds the day-trading buying power limitation, the firm will issue a day-trading margin call to the pattern day trader. The pattern day trader will then have, at most, five business days to deposit funds to meet this day-trading margin call. Until the margin call is met, the day-trading account will be restricted to day-trading buying power of only two times maintenance margin excess based on the customer's daily total trading commitment.

If the day-trading margin call is not met by the fifth business day, the account will be further restricted to trading only on a cash available basis for 90 days or until the call is met. In addition, the rules require that any funds used to meet the day-trading minimum equity requirement or to meet any day-trading margin calls remain in the pattern day trader's account for two business days following the close of business on any day when the deposit is required.

The rules also prohibit the use of cross-guarantees to meet any of the day-trading margin requirements. The primary purpose of the day-trading margin rules is to require that certain levels of equity be deposited and maintained in day-trading accounts, and that these levels be sufficient to support the risks associated with day-trading activities.

It was determined that the prior day-trading margin rules did not adequately address the risks inherent in certain patterns of day trading and had encouraged practices, such as the use of cross-guarantees, that did not require customers to demonstrate actual financial ability to engage in day trading. Most margin requirements are calculated based on a customer's securities positions at the end of the trading day.

A customer who only day trades does not have a security position at the end of the day upon which a margin calculation would otherwise result in a margin call. Nevertheless, the same customer has generated financial risk throughout the day.

The day-trading margin rules address this risk by imposing a margin requirement for day trading that is calculated based on a day trader's largest open position in dollars during the day, rather than on his or her open positions at the end of the day. The SEC received over comment letters in response to the publication of these rule changes.

Day trading refers to buying then selling or selling short then buying the same security on the same day. Just purchasing a security, without selling it later that same day, would not be considered a day trade. As with current margin rules, all short sales must be done in a margin account. If you sell short and then buy to cover on the same day, it is considered a day trade. Your brokerage firm also may designate you as a pattern day trader if it knows or has a reasonable basis to believe that you are a pattern day trader.

For example, if the firm provided day-trading training to you before opening your account, it could designate you as a pattern day trader. Would I still be considered a pattern day trader if I engage in four or more day trades in one week, then refrain from day trading the next week?

In general, once your account has been coded as a pattern day trader, the firm will continue to regard you as a pattern day trader even if you do not day trade for a five-day period. This is because the firm will have a "reasonable belief" that you are a pattern day trader based on your prior trading activities. However, we understand that you may change your trading strategy. You should contact your firm if you have decided to reduce or cease your day trading activities to discuss the appropriate coding of your account.

This collateral could be sold out if the securities declined substantially in value and were subject to a margin call. The typical day trader, however, is flat at the end of the day i. Therefore, there is no collateral for the brokerage firm to sell out to meet margin requirements and collateral must be obtained by other means.

Accordingly, the higher minimum equity requirement for day trading provides the brokerage firm a cushion to meet any deficiencies in the account resulting from day trading. The credit arrangements for day-trading margin accounts involve two parties -- the brokerage firm processing the trades and the customer.

The brokerage firm is the lender and the customer is the borrower. No, you can't use a cross-guarantee to meet any of the day-trading margin requirements. Each day-trading account is required to meet the minimum equity requirement independently, using only the financial resources available in the account.

What happens if the equity in my account falls below the minimum equity requirement? I'm always flat at the end of the day. Why do I have to fund my account at all? Why can't I just trade stocks, have the brokerage firm mail me a check for my profits or, if I lose money, I'll mail the firm a check for my losses? It is saying you should be able to trade solely on the firm's money without putting up any of your own funds.

This type of activity is prohibited, as it would put your firm and indeed the U. The money must be in the brokerage account because that is where the trading and risk is occurring.

These funds are required to support the risks associated with day-trading activities. You can trade up to four times your maintenance margin excess as of the close of business of the previous day. You should contact your brokerage firm to obtain more information on whether it imposes more stringent margin requirements. If you exceed your day-trading buying power limitations, your brokerage firm will issue a day-trading margin call to you.

Until the margin call is met, your day-trading account will be restricted to day-trading buying power of only two times maintenance margin excess based on your daily total trading commitment. Day trading in a cash account is generally prohibited. Day trades can occur in a cash account only to the extent the trades do not violate the free-riding prohibition of Federal Reserve Board's Regulation T. In general, failing to pay for a security before you sell the security in a cash account violates the free-riding prohibition.

If you free-ride, your broker is required to place a day freeze on the account. No, the rule applies to all day trades, whether you use leverage margin or not.

For example, many options contracts require that you pay for the option in full. As such, there is no leverage used to purchase the options. Nonetheless, if you engage in numerous options transactions during the day you are still subject to intra-day risk. You may not be able to realize the profit on the transaction that you had hoped for and may indeed incur substantial loss due to a pattern of day-trading options.

Again, the day-trading margin rule is designed to require that funds be in the account where the trading and risk is occurring. Can I withdraw funds that I use to meet the minimum equity requirement or day-trading margin call immediately after they are deposited?

No, any funds used to meet the day-trading minimum equity requirement or to meet any day-trading margin calls must remain in your account for two business days following the close of business on any day when the deposit is required. Frequently Asked Questions Why the change? Were investors given an opportunity to comment on the rules? Definitions What is a day trade? Does the rule affect short sales?

Does the rule apply to day-trading options? The day-trading margin rule applies to day trading in any security, including options. What is a pattern day trader? Day-Trading Minimum Equity Requirement What is the minimum equity requirement for a pattern day trader? Can I cross-guarantee my accounts to meet the minimum equity requirement?

Buying Power What is my day-trading buying power under the rules? Margin Calls What if I exceed my day-trading buying power? Accounts Does this rule change apply to cash accounts? Does this rule apply only if I use leverage?