What is a Good Faith Violation (GFV)?

A good faith violation (GFV) occurs when a cash account buys a stock or option with unsettled funds and liquidates the position before the settlement date of the sale that generated the proceeds. Stocks and ETFs settle trade date plus two business days, or more commonly known as T+2, and options settle the next business day (T+1). A cash account is not limited to a number of day trades. However, you can only day trade with settled funds. 

Cash accounts are not subject to pattern day trading rules but are subject to GFV's. Pattern day trading (PDT) rules only pertain to margin accounts.

What is Settlement?

The concept to nail down to avoid GFV's is having a good understanding of settlement. When you buy/sell stocks or options in a cash account, the cash used for a purchase, or proceeds from a sale, is not delivered until the settlement date.

Let’s use a real-life non-trading example to describe settlement better. You lend your friend $20, and he promises to repay you tomorrow. Next day comes, and your friend pays you back. The loan is now settled! This is the same concept as trade settlement.

What happens if I get multiple GFV?

Good faith violation cannot be met. Five or more good faith violations in a rolling 12 month period will result in a 90-day restriction to closing-only on the account. We understand that GFV's can happen, but getting one isn't the end of the world. If you do receive one, then you'll want to keep track of how many you've had to avoid getting into a 90-day closing-only restriction.

Examples of GFVs

Example with stock (Settlement: T+2)

Sell 100 MU (MU settles)
 Buy 100 CRM* 
 Sell 100 CRM^ 

*Using the proceeds from selling 100 MU

^Good Faith Violation is generated  

A GFV occurs on Tuesday with the sale of 100 shares of CRM since the proceeds from the sale of 100 shares of MU do not settle until Wednesday.

Example with options (Settlement: T+1)

Cash account starts the day with $500

Buy 5-lot XYZ Calls @ 1.00(XYZ Call purchase settles)(XYZ Call sale settles)
 Sell 5-lot XYZ Calls @ 1.50 
 Buy 3-lot ABC Puts @ 2.00* 
 Sell 3-lot ABC Puts @ 1.00^ 

*Using the proceeds from selling 5-lot XYZ Calls @ 1.50

^Good Faith Violation is generated 

Much like the stock example, a GFV occurs on Tuesday after the sale of the ABC puts since the proceeds from the sale of the XYZ calls do not settle until Wednesday. Since the proceeds of the XYZ calls were immediately used to purchase the ABC puts, the liquidation of the puts generated a GFV.