7

In a cash account, the proceeds from the sale of any security will be held until settlement; for options, this is effectively overnight. One can sell an option on one day, and then use the funds the next day to purchase something else. If I attempt to purchase something with the unsettled proceeds from a sale, I am subject to the free-rider rule, which prohibits me from selling the new purchase until the first sale has settled.

In a margin account, the proceeds from the sale of stock can be used immediately to enter a new position. However, options aren't marginable. Does this affect the calculation of buying power and the free-rider rule? When I sell an option in a margin account, can I use those proceeds immediately and without restriction, or am I still limited to the buying power with which I started the day?

6
+100

Yes.

I heard back from a couple brokerages that gave detailed responses. Specifically:

In a Margin account, there are no SEC trade settlement rules, which means there is no risk of any free ride violations.

The SEC has a FAQ page on free-riding, which states that it applies specifically to cash accounts. This led me to dig up the text on Regulation T which gives the "free-riding" rule in §220.8(c), which is titled "90 day freeze". §220.8 is the section on cash accounts. Nothing in the sections on margin accounts mentions such a settlement restriction.

From the Wikipedia page on Free Riding, the margin agreement implicitly covers settlement.

"Buying Power" doesn't seem to be a Regulation T thing, but it's something that the brokerages that I've seen use to state how much purchasing power a client has. Given the response from the brokerage, above, and my reading of Regulation T and the relevant Wikipedia page, proceeds from the sale of any security in a margin account are available immediately for reinvestment. Settlement is covered implicitly by margin; i.e. it doesn't detract from buying power.

Additionally, I have personally been making these types of trades over the last year. In a sub-$25K margin account, proceeds are immediately available. The only thing I still have to look out for is running into the day-trading rules.

2

I'd say yes, and hope that my anecdotal evidence serves as proof.

My IRA is not a margin account. It can't be. I attempt to create a covered call, buying a stock at say $20, and selling a call for $4, for net $16 cost. The account only had $1610 at the time, and the trades go through just fine. Yes, I needed to enter as a limit order, at the same time, a single order with the $16 debit limit.

If this is not enough proof, I'd be curious - why not? The option proceeds must clear, of course, which it does.

  • Buy-write is a single transaction, which is why that'll work. Also, I'm asking specifically about margin accounts. – AndrewS Jul 14 '13 at 2:37
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    @AndrewS - Understood. I was making a bit of an assumption in drawing my conclusion. BTW - have you asked the broker? – JTP - Apologise to Monica Jul 14 '13 at 3:38
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    I just added a bounty to get you a better answer than my supposition. – JTP - Apologise to Monica Jul 15 '13 at 15:46
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    @AndrewS - sorry no other answers this week, the bounty will go to your own answer below. – JTP - Apologise to Monica Jul 22 '13 at 15:37
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    Thanks! I'm in the process of converting to margin, so I should have a definitive answer (at least for my broker) here shortly. – AndrewS Jul 22 '13 at 16:24

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