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I've been interpreting this 4x rule all wrong. Its been too long since I read Reg. T and rule 2520 and the interpretrive rule 98-102 for daytraders. The 4x rule is actually laxer than the current 2x rule now in effect. If I originally had $25,000 in my account and I bought $50,000 in AMZN (max under Reg. T) and hold overnite which lets say drops in value such that my equity is now only $15,000, the debit is $25,000 from the original purchase. I borrowed $25,000. Rule 2520 requires me to maintain ownership of 25% of value of AMZN. The value of AMZN is $15,000 + $25,000= $40,000. I have to own at least 25% of the $40,000 which is $10,000. Since I own $15,000 I am okay maintenance wise under Rule 2520. But since I'm stuck in AMZN, I still want to be able to daytrade with the maintenance margin excess I have anyways. Thats where the 2x or 4x rule comes into play. I have to calculate my maintenance margin excess. Its equal to whats left after taking out what I have to maintain in the account to maintain ownership of 25% of the value of AMZN. My maintenance margin excess is $5,000. Its the difference between the $15,000 I own and the $10,000 that I am required to own. So under the old rules, my day trading buying power would have been $10,000 and I could flip this $10,000 as many times as I wanted during the day but I could not exceed this amount on any single open position during the day. If I understand this rule change properly, my day trading buying power is no longer 2 x $5,000=$10,000. Instead my day trading buying power is 4 x $5,000=$20,000 and depending on the broker I have, I can flip this $20,000 as many times as I want throughout the day. However if some brokers want to use the total trading commitment instead of the largest open position then I think that you can only flip say a $5,000 trade four times during the day and then you have to stop day trading. But lets say you open up a $20,000 position intending it to be a daytrade but you get stuck in that trade also and hold it and your AMZN overnite. Now maybe you're in trouble under rule 2520. Now you've borrowed $25,000 for AMZN and borrowed $15,000 for this second stock. Lets AMZN hasn't changed in value. My equity is $15,000 for AMZN and $5,000 for the second stock for a total equity of $20,000. My debit is a total of $25,000 + $15,000 =$40,000. I have to maintain ownership of 25% of the value of the two stocks. AMZN is still worth $40,000. The second stock was worth $20,000 when I bought it. Lets say it didn't change in value. Then under rule 2520 I have to maintain ownership of 25% of the value of the two securities which is 25% of $40,000 + $20,000 = $60,000. I have to maintain ownership of $15,000 of the two stocks. I'm still okay under rule 2520 because I still own $20,000. However I have not put up at least 50% of the money required under Reg. T. If I had exited the second stock before the end of the day, I would have been okay. But under Reg. T I needed to put up at least 50% of the $20,000 to buy the second stock. I only put up the maintenance margin excess of $5,000. I would be subject to a Reg. T margin call of $5,000. |
