Margin and settlement times
Summary of User’s Problem and Solutions Discussed:
- The user is trying to understand how margin-related balances are calculated, particularly in relation to day trading and the implications of buying and selling options contracts with settled and unsettled funds.
- Fidelity’s representative clarified that the user’s example involved day trading and explained the definition of a day trade, including how it’s tracked and the implications of being designated as a Pattern Day Trader (PDT).
- They also discussed the concept of “Intraday Buying Power,” which allows pattern day traders to reuse buying power throughout the trading day based on previous trades.
- The representative emphasized the importance of maintaining a minimum equity of $25,000 to avoid restrictions if classified as a PDT and provided links for further reading on margin and cash account trading rules.
Here’s the full thread
Hello, I am trying to understand how the margin-related balances are calculated
Suppose I have 1k in settled funds and own no margin-able stocks.
Then my Available to Trade Without Margin Impact balance would be 1k.
(“Balance” from here on refers to the Available to Trade Without Margin Impact balance)
If I purchase an option contract for 1k, then my Balance would immediately drop to 0.
If I sell the contract that same day for 2k, then my Balance would immediately increase to 2k.
And that same day, I can continue to buy and sell options contracts,
all without incurring any trading violations or interest
(especially without worrying about settlement time)
as long as I never purchase anything that exceeds my current Balance.
Is this correct?
—
For comparison, in a cash account, I’m fairly sure that…
If I purchase a stock with 1k settled funds
and immediately sell it for 2k
then purchase another stock with the 2k,
(all within the same day)
then the last purchase was made with “unsettled funds”
and I cannot sell it until my previous sale settles (~2 days)
or else I trigger a Good Faith Violation
Thanks for reaching out to us on Discord, @Literal Genie. You’ve touched on a few important topics related to margin usage as well as day trading. Before we discuss the scenario above, we’ll need some context.
First up, the example you’ve provided above sounds like a day trade. A day trade is defined as an opening trade followed by a closing trade in the same security on the same day in type margin. The opening trade must precede the closing trade to be considered a day trade, and the same day includes pre-market, regular session, and after-hours sessions. Please note that day trades are tracked by the number of opening orders closed on the same day (intraday).
Day Trading (Strategies & Risks): https://www.fidelity.com/learning-center/trading-investing/trading/day-trading
This leads us nicely into discussing the Pattern Day Trader (PDT) designation. What does this mean? You would be designated as a PDT after placing four day trades in margin within a five-business day period, or if you have two unmet day trade calls within 90 days. In the event you are classified as a PDT, you can trade up to 4 times the maintenance margin excess (commonly referred to as “exchange surplus”) in your account, based on the previous day’s activity and ending balances. However, the extra buying power is limited only to intraday trades. More on this below.
Additionally, pattern day traders are required to maintain a minimum of $25,000 equity in their account at all times. Keep in mind that once your account is considered as a pattern day trader, that designation is permanent. Failing to meet the minimum equity requirement may result in the account having reduced or restricted buying power.
Margin FAQs: https://www.fidelity.com/trading/faqs-margin (1/2)
(2/2) As promised above, “Intraday Buying Power” is the amount that can be used to buy stocks or options that you intend to day trade (buy and sell on the same day). This buying power is based on your start-of-day balances. Then it updates intraday to reflect day trade executions, money out of the account, core cash, and buying power allocated to open orders.
The scenario you provided above is a good example of Time and Tick. Time and tick allows pattern day traders with unrestricted accounts to reuse the Intraday Buying Power over and over on the same trading day as they close positions. I’ll provide a basic example below for reference.
1. An account has $100,000 of Intraday Buying Power (ITBP) in a non-restricted account
2. Client buys $100,000 of XYZ, ITBP goes to $0.
3. Then sells the shares of XYZ that were purchased at $100,000
4. Result: ITBP is restored back to $100,000 to be used again that day if needed
There are situations in which day traders can lose the use of time and tick. In such cases, the IDBP does not “reset” after each closing trade, and counts down as new trades are executed. Your Intraday Buying Power balance will update on all our platforms, and should be referenced before placing new trades.
As for your second example regarding a cash account, you’re spot on. If you do not have margin enabled on your account, remember that trading in a cash account is subject to cash trading rules, and violating these industry rules can result in your account being restricted. You can check out the article below for a more thorough explanation of these cash trading rules and how to avoid them.
Avoiding Cash Account Trading Violations: https://www.fidelity.com/learning-center/trading-investing/trading/avoiding-cash-trading-violations
Okay, that makes sense, thanks!
> In the event you are classified as a PDT, you can trade up to 4 times the maintenance margin excess (commonly referred to as “exchange surplus”) in your account, based on the previous day’s activity and ending balances. However, the extra buying power is limited only to intraday trades. More on this below.
>
> […]
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> As promised above, “Intraday Buying Power” is the amount that can be used to buy stocks or options that you intend to day trade (buy and sell on the same day). This buying power is based on your start-of-day balances. Then it updates intraday to reflect day trade executions, money out of the account, core cash, and buying power allocated to open orders.
~~And just to verify… it sounds like the maximum “Intraday Buying Power” amount is derived from the “exchange surplus”~~
~~ie IBP = 4 * surplus~~
~~or am I misreading?~~
well actually nvm, seems Google has a few decent explanations on that
anyways, that clarified a lot, thanks again
You’re most certainly welcome, @Literal Genie! Feel free to reach out anytime with additional questions.