Using Proceeds from the Sale of Overnight Position (The Classic Way)
By far the most common way customer’s generate Day Trading margin calls is by closing out an existing position held overnight, and then day trading on the proceeds. In general, an account which is not in aggregation, and that has no overnight positions, has a much smaller likelihood of generating a DT call.
When you close a position your option buying power and stock buying power will increase, but it is important to note that your starting day trading buying power does not increase. Day trading buying power can never increase intraday.
While it is acceptable to use the proceeds from a closing transaction to enter into a new opening transaction, it is not acceptable to use the proceeds to day trade with. You cannot exceed your starting day trading buying power when day trading.
Let’s look at a couple of examples:
Option buying power is $3,000. Day trading buying power is $3,000.
Customer has a long overnight position of 50 XYZ Jan 50 calls with a market value of $5,000.
Trade 1 (8:35 AM)- STC 50 XYZ Jan 50 calls $1.10. Option BP increases to $8,500.
Trade 2 (9:00 AM)- BTO 100 ZZZ Feb 35 calls $0.75 ($7,500.00)
Trade 3 (11:00 AM)- STC 100 ZZZ Feb 35 calls $0.80 ($8,000.00)
The customer day traded the ZZZ options. The day trade charge is the requirement for the opening trade, or $7,500. He exceeded his starting day trading buying power by $4,500 and a DT call will be issued for this amount.
Option BP is $2,500. Day trading buying power is $2,500.
Customer has an overnight position consisting of 10 five-point credit spreads, with a requirement of $5,000.
Long 10 XYZ 50 puts $0.40/ short 10 XYZ 55 puts $1.00.
Trade 1 (10:00 AM)- The customer buys in the spread, spending $600. His option BP increases to $6,900.
Trade 2 (10:30 AM)- BTO 15 QQQ April 40 puts $0.20/ STO 15 QQQ April 45 puts $0.60 ($0.40 credit)
The requirement for this trade is $6,900
Trade 3 (1:30 PM)- STC 15 QQQ April 40 puts $0.25/ BTC 15 QQQ April 45 puts $0.75
The customer day traded the credit spread. The requirement for the opening transaction is $6,900. He has exceeded his starting day trading buying power by $4,400 and a DT call will be issued to the customer for this amount.