Does this trick, bypass the Pattern Day Rule?

Discussion in 'Trading' started by bluehills, Jul 16, 2012.

  1. bluehills

    bluehills

    For those unfamiliar, the Pattern Day Rule applies to accounts below $25,000. Only 4 day trades can be made in any 5 business day period.
    Using a trade in the SPY as an example, could someone tell me if this type of position adjustment, would get around the limits of the pattern day rule.

    On Monday morning (Day 1) at 10AM, we buy 100 shares of SPY at $135. Later that day with two more hours of trading left before the 415PM close, the price of SPY has gone up to $136, giving us a $100 profit should we decide to sell. If this is done however, it will count as a day trade, and limit us to 3 more day trades for the next 4 business days. Instead of selling for the $100 profit before the close, we purchase a 138Put option in SPY with 2 weeks to go for $250.

    The next day (Day 2), SPY opens around the same price as the day before. We sell back the 100 shares of SPY purchased at $136, and sell the 138Put option from the day before for $250. After making these two trades Tuesday morning (Day 2), no day trade has accumulated, based on how we used options to sidestep the pattern day rule. Is this example feasible?
     
  2. cornix

    cornix

    Option trades are counted too (at least by IB), so the answer is no.
     
  3. You could also go long a SPY inverse etf with the right allocation to make up for the price difference and close out the position the following morning.

    Going long the inverse etf neutralizes your SPY position.
     
  4. Option trades are counted as a day trade if they were bought and closed on the same day. In the example mentioned, both were closed the next day so the answer is YES, the example is feasible since the trades will not count as day trades.
     
  5. cornix

    cornix

    Ah right, my bad, daytrade indeed must be opened and closed the same day... Well, yes it should work then. :)
     
  6. If your willing to drop the margin on your account and make it cash only that will bypass the rule completely. When I started doing a lot of intraday options trading and wasn't selling spreads much it saved me a ton of hassle. But sometimes dropping it isn't an option
     
  7. I didn't realize the pdt rule only applied to margin accounts. I checked Wikapedia and they confirm this. Good post. Thanks a lot.
     
  8. No problem, keep in mind though that option trades clear overnight in a cash account, which isn't bad, but I am not sure how long it takes on the stocks. So that part might suck.
     
  9. d08

    d08

    You're forgetting spreads, an extra cost.
     
  10. another good point FCX. I think I'm going to try it.
    Regards
     
    #10     Jul 17, 2012