No strategy is more dissimilar to initial exchange margin requirements than day trading naked options, especially day trading strangles and straddles. These two strategies are not currently recognized by FINRA as bona fide spreads when it comes to day trading. Both the put and the call side of a strangle will have a day trade charge, and the price used for the underlying stock is the closing price of the previous business day, not the price at the time of trade. Both of these things can have a profound effect on day trading requirements for the pattern day trader.
Example #1: Single Naked Option
Trade 1 (10:00 AM)- STO 25 QQQ Dec 60 calls $2.50 (current stock price 58. Stock price at the close of previous business day is 60).
The charge against overnight buying power for entering into this trade is $31,250.
Trade 2 (12:00 PM)- BTC 25 QQQ Dec 60 calls.
The customer has now day traded the naked options, and look at what happens to the requirement.
The price of the underlying used in the calculation is now 60, not 58. The day trade requirement is now $37,500. This is a difference of $6,250 from the exchange requirement shown above.
Example #2: Strangle
Trade 1 (8:33 AM)- STO 20 XYZ April 150 calls $1.50/STO 20 XYZ April 130 puts $1.25 (current stock price is 140. Stock price at the close of the previous business day 1s $142.50).
The charge against overnight buying power for this strangle is $50,500.
Trade 2 (1:50 PM)- BTC the strangle.
The price of the underlying used in the calculation is now 142.50, not 140, and, most importantly, each side of the strangle, both put and call, has a day trade requirement.
The day trade margin requirement for this strangle is $102,500. This is a difference of $52,000 from the exchange requirement shown above.
Example #3: Strangle
A customer comes into the day with $10,000 of starting day trading buying power, and a short position of 50 QQQ March 40 calls ($2.30). QQQ closed at 38 the previous night. The requirement for this position is $49,000.
Trade 1 (9:15 AM)- STO 50 QQQ March 35 puts $1.00. (Stock price remains 38)
This trade is paired against the short call position, and the exchange requirement to place this trade is the premium of the puts, or $5,000. The customer does not need to put up any additional funds, as the $5,000 in proceeds are applied to the trade.
Trade 2 (11:45 AM)- BTC 50 QQQ March 35 puts.
The customer has day traded the puts. The requirement for this trade is $32,500, and a day trade call in the amount of $22,500 will be issued to the customer.