Understanding and Avoiding Day Trade Calls: A Comprehensive Guide
Day trade calls, also known as margin calls, can be a significant concern for active traders. This article aims to clarify what a day trade call is, how it occurs, and the consequences of not meeting such calls in time. We will also discuss the procedures for covering a day trade call and the importance of understanding margin trading rules.
What is a Day Trade Call?
A day trade call happens when a trader places opening trades that exceed their account's day trade buying power. The trader then closes these positions on the same day. By the next day, the account has 5 business days to meet the call by depositing cash or marginable securities. During this period, the account balance is reduced to 2 times the exchange surplus from the previous day, without using time or tick allowances.
Examples and Illustrations
Consider the example of a hypothetical day trader utilizing day trade buying power to buy and hold XYZ stock overnight. The trader then sells shares of XYZ on the following day, generating additional margin buying power. Utilizing these proceeds, the trader buys shares of ABC stock, which drops in value due to bad news. This situation would create a day trade call since the trader was not using day trade buying power but margin buying power.
Consequences and Restrictions
As a day trade call holder, you are initially allowed to have 2 day trade liquidations within a rolling 12-month period. However, if you incur a third call, your account will be restricted for 90 calendar days. During this period, your day trade buying power will be based on the exchange surplus without the use of time and tick allowances, after which the 12-month rolling calendar resets.
How to Cover a Day Trade Call
The preferred method to cover a day trade call is through a deposit. If this is not possible, another option is to liquidate positions in your account. To determine the amount of stock needed to meet the call, multiply the call amount by 4 or divide by 25. The calculation changes based on leveraged ETFs or other securities with higher margin requirements.
Understanding and Reviewing Margin Account Trading Rules
It is crucial for active traders to review margin account trading rules prior to placing any new positions. A lack of understanding can lead to significant issues, such as facing day trade calls or restrictions on your account. This review should cover the intricacies of margin account balances, margin call procedures, and day trade liquidations.
By staying informed and adhering to these guidelines, you can avoid the pitfalls of day trade calls and manage your margin account effectively, ensuring a smooth trading experience.