Good Faith Violations
Day-trading comes with certain rules you need to understand and abide by, lest you get slapped and told to sit on your hands for the next 90 days. There is no worse punishment for a trader than not being able to trade.
A “good faith violation” (GFV) occurs when a trader buys a security and sells it before paying for the initial purchase in full using settled funds. Only cash or the sales proceeds of fully paid-up securities qualify as “settled funds”. According to Schwab, its settlement date for ThinkorSwim® is the purchase date plus one business day, known as T+1. As recent as last May of this year, the settlement date was T+2, but that has recently changed. The same holds true for Tastytrade®. To be clear, you may want to confirm this with your particular broker.
Using a cash account, as we recommend, the trader needs to pay for all purchases in full with settled funds. Therefore, you must wait until your previous trades are settled before embarking on another trade, that being the following day.
For example, if you have $5,000 available in your account and buy 20 contracts of SPDR S&P 500 ETF Trust (NYSEARCA: SPY) at $2.50, you would have spent your entire balance of $5,000. If, later that afternoon, you sell your 20 contracts for $3.00, you now have $6,000. If you buy another round of options before the closing bell, you will receive a good faith violation. You must wait until the following business day to use your $6,000 to buy more securities.
If you now have $6,000 in your account and purchase eight SPY contracts for $2.50, you will have spent $2,000, enabling you to buy another $4,000 worth of options. Once those trades settle on the following day, you will be able to trade the full amount again.
Should you make this error and extend your credit, you will be notified of a good faith violation. With Schwab, if you receive three GFV’s in a 12-month rolling period, you will be restricted in your trading for 90 days. Tastytrade is a little more forgiving, allowing four GFVs, restricting your trading on your fifth violation, whereby you can only close positions. Be careful not to get caught overtrading as you will certainly miss future opportunities.
It is an easy error to make, but you must ensure that you are adequately funded. If you do go over and are sent to sit in the corner for bad behavior, there is a way back to trading… simply open another account and transfer your funds there. You can even do it with the same broker, from what one broker explained. I know of traders who use multiple accounts, switching from one to another to ensure they don’t violate the rules.
In addition to miscalculating your trades, the most common way to earning a GFV is to trade and not realize that the markets may be open during some bank holidays. For example, we recently had Columbus Day/Indigenous People’s Day. Equity markets were open on October 14, 2024, but it was a banking holiday, meaning that it did not count as a settlement day. Had you traded in excess of your funds on Monday, you may have received a GFV. Veterans’ Day, Nov. 11, is another such day.
The best way to avoid a GFV is to simply overfund your account, ensuring you are adequately capitalized. If you, for example, have $500,000 in your retirement account, you may as well keep much of it in your Schwab account to cover your day-trading activity. Just pay attention so that you do not encumber those funds.
DayTradeSPY offers a myriad of services designed to make you a great trader. Whether your interests are to learn to trade or simply receive a buy signal on a particular option, we have you covered.
Click here for information on the highly successful DTS Signal. Click here for the Pick of the Day and click here for details on the Inner Circle.
If you are familiar with calls and puts, you belong in our highly esteemed, world-famous Trading Room. Click here for details.
Why SPY? This stock provides for the most diverse exchange traded fund and it has the highest volume and the most liquidity. SPY options are also very affordable and highly predictive in their direction and strength. Nothing compares. And when you trade the best fund available, you can generally do so with complete confidence that the market will provide a reasonable return on your investment.
P.S. The Orlando MoneyShow takes places this year Oct. 17-19 at the ChampionsGate Resort.
We’ll be at the Orlando MoneyShow from Thursday through Saturday. Swing by and say hi at the Eagle Financial Publications booth and make sure you see Ahren on stage at 8:15 a.m. and 1:45 p.m. Friday. Other speakers include Keith Fitz-Gerald, Steve Moore, Dr. Mark Skousen, Charles Payne, Louie Navallier, Kelly Wright, Peter Schiff, George Gilder, Adrian Day, Brien Lundin and Ed Yardini. To learn more and register, click here. Sign up soon, before the $149 registration price rises. Use promo code 063467 for the discount.
