Naked Options

There are two important things to know about day trading naked options. 1) The price of the underlying stock used in the day trade charge calculation is the closing price of the previous business day. 2) Strangles and Straddles are not currently considered a bona fide spreading strategy. Being short a call does not hedge being short a put, and vice versa. When day trading Strangles and Straddles the full requirement for each naked option is calculated separately. This has a profound effect on strangles and straddles requirements. (See: “Day Trading Requirements: Naked Options/Strangles/Straddles”)

Example #1: Single Naked Option

A customer has starting day trading buying power of $33,000. He has no overnight positions.
Trade 1 (10:15 AM)- STO 20 QQQ Feb 70 puts $0.35. (QQQ is trading 65, which is down $4.00 on the day; QQQ closed 69 the prior business day.)

The initial requirement for this sale is $33,200, less the $700 in proceeds, or $32,500. The customer is allowed to make this trade.

Trade 2 (1:00 PM)- BTC 20 QQQ Feb 70 puts $0.30.

The customer has now day traded the options. The day trading charge is calculated much differently.

  • The price of QQQ used to calculate the day trade charge is the close of the previous business day, or a price of 69, not 65. This has the effect of changing the requirement to $26,800.

The day trade charge for this trade is $34,500. This figure exceeds his starting day trading buying power by $1,500 and a DT call will be issued to the customer in this amount.

Example #2: Strangle

A customer has starting day trading buying power of $50,000. He has no overnight positions.
Trade 1 (9:00 AM)- STO 30 ZZZ March 84 calls $0.05/ STO 30 ZZZ March 81 puts $0.07. (ZZZ is trading $82.50, which is unchanged from the previous business day close.)

The initial requirement for this trade is $57,375. This calculation is based on the exchange requirement of the larger of the two options (the 84 puts, in this case) plus the premium of the lesser of the two options ($150 for the 81 calls), less the total proceeds of $360.

Trade 2 (10:30 AM)- BTC the strangle, paying $0.10.

The customer has now day traded the strangle. The calculation of the day trading charge is significantly different.

  • Each option is calculated separately. The charge for the put side is $57,375. The charge for the call side is $57,375.

The day trade charge for this trade is $114,750. This figure exceeds his starting day trading buying power by $64,750, and a DT call will be issued to the customer in this amount.