Pattern Day Rule bypassing per example

Discussion in 'Risk Management' started by bluehills, Jul 16, 2012.

  1. bluehills

    bluehills

    (I hope this is the right forum)

    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?