Pattern Day Rule bypassing per example

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

  1. 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. Read through this:

    I think you're okay to do this, being that they are different securities (PDT also applies to options). However, once you sell the next day you cannot buy those securities again for another day. One could also do this with inverse ETFs to essentially flatten their position. The disadvantage with either strategy is the increase in transaction fees. Being that your account is under 25k, the transaction fees will play a sizable role in your R/R. You should try to swing trade...

    If you really want to day trade equities and get around the PDT, try going to a prop firm. Check out the forum on ET for some prop shops that let you put up 5k and trade their capital. You could also open up multiple cash accounts, but like I said, you are limited with less than 25k.

    Forex can be good for scalping and you can make some amount of money with a small account. No account minimums on some brokers and you can daytrade all you want.
  3. ok my thoughts are ... your going to expose yourself to all kinds of more risks just to lock in a 100 dollar profit.. IE the bid and ask spread of the options trade... commissions etc.. trade futures or forex .. the ES something. i just opened a butterfly with four seperate legs.. i posted a sale of the deal thinking hey.. if it goes into this much profit.. i'm down for it to be taken from me.. well the order sold later that day and it triggered the PDT four legs open.. four legs closed and now i can't trade the account! gotta love that..
  4. The best practice, which also allows you to daytrade, would be to open with a synthetic long at one strike, and close (same-day) with a synthetic short at another strike. The resulting long/short synthetic is a box arb (pure rates arb) at <$60 per contract in overnight margin.

    Buy the 134 synthetic which is 2-3 ticks wide in SPY. Sell the 135 synthetic at will.

    Obviously works with any optionable ticker, but spreads will be equivalent to those of an ATM straddle. Just be sure to offset the previous day's synthetics as new signals come in.
  5. thats good thinking right there... just have to consider the margin on the short options
  6. No, the synthetic is less costly in initial req that the outright.
  7. yeah i was quick to respond without thinking... your right... there is slippage risk in illiquid options.. i would hope that would be assumed and one would be trading options with heavy liquidity..
  8. The above would allow you to enter 5-10 day trades within a wide-range of strikes, limited by liquidity as you go deep farther from the ATM strike. On ETFs or liquid names it's viable. Beyond that freq it's not practical.
  9. yeah but if your a directional daytrader TA guy you better jump into volatility trading book as well if your gonna start doing that.. theres alot more to daytrading options then meets the eye.. IE theta, vol, open interest etc.. etc.. etc..
  10. lol there is zero greeks in that position, save for delta. It's inert.
    #10     Aug 13, 2012