I’m still learning as new things develop. I got hit with a trading violation for 90 days a while back for trading with “uncleared funds”. When you sell an option it takes one day, overnight, for the funds to clear so that you can use those funds again. When you sell a stock it takes two days for the funds to clear. Back when IWM traded weekly we didn’t have to worry about funds clearing since the weekend gave them plenty of time to clear. When IWM started expiring three times a week I got caught out by getting assigned on a Wednesday, and, thinking I now had access to my cash, placing another trade on Thursday morning. With all the market volatility I had also sold calls in the morning and bought them back in the afternoon a few times. Do that three times and they slap a trading violation on you. That means I can’t use any uncleared funds. They will let you do it a few times, but do it too much and you get busted. This is Federal law, not Fidelity or Schwab’s rules. It also turns out the restrictions are different for a taxable account and a tax-protected account, and I was trading them both the same.
So, how to avoid this problem?
When you place a trade, pay attention to any messages that say anything about “funds available to trade”. You can also look at your account balances and you’ll see “funds available to trade” and that’s what you can work with. When in doubt call ’em and make sure your trade is ok to place. And of course absolutely do not use margin loans for trading, you never want to borrow money to trade. If you get margin they will let you but if you screw up you will be in deep hurt.
The question is, how did we do rolls before without bumping into this? When you do a roll you buy one contract using the uncleared cash from selling the next one. I’m not sure, and the Fidelity guy couldn’t explain it to me. I ‘think’ rolls are ok, in my case I was just trading too frequently in my 401K and the trading violation meant I was restricted, but I didn’t know that so I kept trading. That’s what triggered my violation.
In my case, to get around this, I got margin on my taxable account. So now when I place a same-day trade, in effect they loan me the money to do the second half of the trade. Then overnight the funds clear and the loan disappears. I can’t borrow more than whatever I’m selling, but this allows me to trade without bumping into the restrictions. In my tax-protected account, a roll over 401K, the laws are different there and I was only able to get limited margin, which is a technicality but basically does the same thing.
I’m back in business.
So, how to avoid this problem?
When you place a trade, pay attention to any messages that say anything about “funds available to trade”. You can also look at your account balances and you’ll see “funds available to trade” and that’s what you can work with. When in doubt call ’em and make sure your trade is ok to place. And of course absolutely do not use margin loans for trading, you never want to borrow money to trade. If you get margin they will let you but if you screw up you will be in deep hurt.
The question is, how did we do rolls before without bumping into this? When you do a roll you buy one contract using the uncleared cash from selling the next one. I’m not sure, and the Fidelity guy couldn’t explain it to me. I ‘think’ rolls are ok, in my case I was just trading too frequently in my 401K and the trading violation meant I was restricted, but I didn’t know that so I kept trading. That’s what triggered my violation.
In my case, to get around this, I got margin on my taxable account. So now when I place a same-day trade, in effect they loan me the money to do the second half of the trade. Then overnight the funds clear and the loan disappears. I can’t borrow more than whatever I’m selling, but this allows me to trade without bumping into the restrictions. In my tax-protected account, a roll over 401K, the laws are different there and I was only able to get limited margin there, which is a technicality but basically does the same thing.
My trading restrictions fall off on Monday, and now I’ve got margin set up on everything, so I’m back in business.
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