How to lock-in profits without violating PDT for Margin accounts under $25k

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How to lock-in profits without violating PDT for Margin accounts under $25k

Short answer: Wwitch to a cash account

Long answer: open a debit spread, 1 strike away from what you are holding

Debit call spread means higher strike price option, same expiration, as the option you are holding.

For example, you have TSLA 890 Call. Sell 895 Call, the next higher strike option on the options chain.

Debit put spread means sell lower strike option, same expiration, as the option you are holding.

For example, you have TSLA 890 Put. Sell 885 Put, the next lower strike option on the options chain.
The amount of profit you lock in will be equal to how much credit you collect from selling (STO/sell to open) the option.

+ Advantages
Locks in profit without PDT in margin account

If the stock moves against you, there will be minimal lost profits.
Vertical debit spreads take a much bigger move in the underlying stock than single leg options to make any gains/losses.

-Disadvantages
– Any multi-leg option trades have the risk of assignment (which may cause some temporary outage to your account depending on how good your broker is)
-You cap your gains if the stock continues to move in your favor to the difference between the two options.

For example, 890 Call – 895 Call = $5 max gain (but realistically this is only if you hold until expiration)

-The hidden fee of paying to close additional options especially if the option chain has a wide bid-ask spread
Example
You bought TSLA 890 Call expiring June 5, 2020. These are all the same expiration date options.
885 Call = $10.60
890 Call = $8.60
895 Call = $7.00

TSLA moves up $5. Now everything shifts.
890 Call = $10.60 (where the 885 Call was previously)
895 Call = $8.60 (where the 890 Call was previously)

You sell the 895 Call for $8.60. Your 890 Call will always be worth the same or more than the 895 Call. So, if your 890 Call goes to 0, the 895 Call will also be at 0 but you will still have collected $8.60 in premium. It would take a huge move down for these options to drop that much in value but there is that risk.
Realistically if you are closing tomorrow, it is unlikely to happen. Plus, now there is potential for upside because 10.60 – 8.60 = $2 but the max potential for debit spread is $5 because 895 Call – 890 Call = $5.

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