There are many ways to day trade with an account smaller than $25,000. Let’s dive into why you need to get crafty to day trade with less than $25,000 and how to get around the PDT rule.
What is the PDT rule?
Most options traders quickly learn about the pattern day trader (PDT) rule within their first few weeks of trading. Given how often our admins make day trades, following a few alerts will likely teach you about the PDT quickly.
The PDT rule states that traders with less than $25,000 in their margin account can’t make more than three day trades in a rolling five-day period. You may be thinking, “but BootyTrades made three day trade alerts today. How am I supposed to follow his alerts?!”
Fortunately for you, there are a few ways to get around the PDT rule. What are they? Read on to find out.
Max’s Favorite Way: DEBIT SPREADS BABY
How much does Max love debit (also known as “ghetto”) spreads? So much that he made a whole class on it.
What is a debit (ghetto) spread?
I’ll give you the technical definition first.
“A debit spread, or a net debit spread, is an options strategy involving the simultaneous buying and selling of options of the same class with different strike prices requiring a net outflow of cash, or a “debit,” for the investor. The result is a net debit to the trading account. Here, the sum of all options sold is lower than the sum of all options purchased, therefore the trader must put up money to begin the trade.” – Investopedia.com
Now I’ll put it in Max’s words so you can better understand.
“Let’s say you had a put or call option. It’s currently up around 50 percent. You don’t have any day trades due to your pattern day trader restrictions. Maybe you got a good faith violation. Maybe you’re under 25k in your account.
You can at any time change your naked call or put option into a debit spread. You do this is by selling the strike price one outside of the money to your current strike price.
If you had a $300 call, you would sell a $301 call. If you had a $300 put, you would sell a put for $299. You go one out of the money, turning your naked call or put into a debit spread.
So I know what you’re thinking. What the hell does this do? This strategy is the most comfortable way of locking in your gains while mitigating almost all risk. ” – Max Heaney
So take Max’s course on debit spreads to really understand this strategy and lock in those profits.
Open Multiple Brokerage Accounts
This one is pretty simple. Each brokerage account gives you three day trades per rolling five-day period. So if you have accounts with three brokerages, that’s nine total day trades. I wrote about the three brokerages MOT likes best, so why not just nab an account with all three if you plan to day trade.
Since two of the three brokerages we like the best offer no commissions on options trades, and the one that does has the best trading software built-in, there are few downsides to this strategy.
One downside to consider is spreading your money too thinly. If you only have a couple of thousand dollars, you won’t have enough money to truly spread across two to three accounts. If you see a call out from our admins that you want to open a large position on, you may not be able to.
This strategy is best for traders with $10,000 or more and don’t plan to overleverage their accounts. Actually, go ahead and spread your money thin so that you can’t overleverage your accounts. Nothing is more frustrating than a trader who puts 100% of their account into one trade and blows it up.
Open A Cash Account
The PDT rule doesn’t apply to cash accounts! 🎉🎉🎉 Traders can make as many day trades as they want to with a cash account but only with settled cash.
Typically cash takes two days to settle. Waiting for cash to settle could mean missing out on trades if you’re a more active trader.
This option is usually best for traders who plan to play smaller positions so that the bulk of their account isn’t “settling” for two full trading days.