Recently I started getting a liquidation warning about my account not having enough funds and is at the risk of being liquidated. So, I called my brokerage (IBKR) to ask why I was getting these liquidation warnings despite having cash in the account. The agent told me that there were some positions that high on maintenance margin and thus contributing to the liquidity issue.
How Do You Know Your Account Is At Risk Of Liquidation?
Firstly, you may get a message like the one below to inform you that your account is at risk of liquidation.
You can also check your account info under “Excess Liquidity”. If it is highlighted, it means you are at risk of getting liquidated. See the screenshot below for reference.
I once found out from an IBKR agent that there are two parameters that we should pay attention to and should not drop to the zero mark and they are SMA and Excess Liquidity. The moment either one of them drops below zero, it means we will go into margins or get liquidated.
What Will Happen When Excess Liquidity Drops Below Zero?
The brokerage then reserves the right to liquidate (sell your shares or close your options contracts) to restore your excess liquidity and make you margin-compliant again. They may target the positions that have the highest margin impact, which also may happen to be the positions that you do not wish to close. So, take the warning seriously and make sure that you do not let your “Excess Liquidity” level drop below zero.
Why Did I Get A Liquidation Warning?
I reckon there are a few reasons. Firstly, I had a Meta BULL PUT spread exercised early and while I have sold off the BUY LEG of that contract, I now own 100 shares of Meta at a breakeven price of USD372. That took away S$50.2k of cash from my account balance.
Secondly, the Covered CALL contracts that I sold on Nvidia are clocking accumulating heavy (unrealized) losses as I sold them when Nvidia was trading just above USD100 back on Jan 23. Now Nvidia has almost 8x, my unrealized losses and maintenance margin have risen significantly, especially as I was short of 200 Nvidia shares in the 3 CALL contracts that I sold.
Lastly, my SELL PUT contracts on Tesla are not doing well either as Tesla was the worst-performing stock in the Mag 7. As the share price continues to fall, the contracts have turned from OTM (Out of The Money) to ITM (In The Money).
What Have I Done To Mitigate The Risk?
I did a top of cash into my brokerage account to increase the amount of spare cash and I also intend to shift some money from my bonds into my brokerage account to increase the excess liquidity. I realized that buying CALL contracts helps in providing more liquidity back into the account, probably as a hedge against the positions that are accumulating large unrealized losses. Thus, I bought quite some CALL contracts on Nvidia. You can check out my Patreon page for the details of my trades.
When Excess Liquidity is back to a healthy level, then it will not be highlighted.
When the share prices of Nivida drops or when Tesla’s share price increases, it helps to replenish the liquidity as well.
Concluding Thoughts
If you ever face a liquidation warning, please do not panic. There is always a solution out there and if you are calm and focused, you will be able to find a solution for your problem. I hope the above sharing is useful and if you have further doubts/ queries, please leave them in the comments. Thank you.
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