I first shared about my margins account liquidity issue when my unrealised loss in my Nvidia SELL contracts was snowballing to USD141.5k because I sold at the worst possible time and went into naked SELL CALL. Then it was Tesla’s turn as the share price kept dropping and that caused my liquidity to keep dropping as well.
When July 24’s correction started, it was double whammy as both Tesla and Nvidia’s share prices were falling drastically.
Tesla’s share price dropped 21% since 10th July.
Nvidia’s share price also dropped more than 20% during the same period.
The huge drop in both stocks has a significant impact on my portfolio as 87% of my 538k shares portfolio are made up of Tesla and Nvidia.
I also have quite a few SELL PUT contracts on Nvidia, and thus, the excess liquidity of my portfolio dropped as the share prices dropped.
Large Liquidity Gone In A Single Day
Prior to Thursday’s (1 Aug) where there was a huge selloff due to recessionary fears, my excess liquidity was around 46k. At one point during the selloff, my excess liquidity dropped to 9k. If it does to negative, my brokerage will automatically liquidate any position to bring this excess liquidity back to at least zero. This includes positions that are eating up high liquidity and having huge unrealised losses.
What Have I Done & Will Do To Handle This Liquidity Crisis?
As this is not something new to me, I have applied some methods that worked for me in the past to increase my excess liquidity and I have added more methods this time round because I am facing a larger crisis than before.
Method 1: Put Up Hedging Positions & Sacrificial Trades
As my portfolio was heavy on Tesla shares, I bought PUT options on Tesla as a form of hedging against it going down and at the same time, it helped to increase my excess liquidity. I described it as sacrificial trades as these PUT contracts (I bought OTM PUT options to minimise my capital) are likely to go to zero.
Example: [25 July 24] Bought 2 x Tesla PUT to increase my liquidity
[25 July 24] -USD234 Loss, Closing My Sacrificial Trade on Tesla
Method 2: Inject Cash Into Account
For the last 2 trading days (1 & 2 Aug), I have injected a total of S$10,000 from my savings into my brokerage account as the excess liquidity level dropped to dangerously low level. I had initially wanted to avoid this as I only had limited cash left. However, this was a desperate move when Method 1 was not as effective anymore.
Method 3: Close Options Positions
I also close some of my trade positions at a loss to increase the excess liquidity on my account. Some SELL PUT positions are taking up large maintenance margins so closing them will reduce the maintenance margins which in turn increase excess liquidity
Example: [30 July 24] -USD384 Loss, Closed Tesla Bull PUT Spread Contracts To Increase Liquidity
Method 4: Sell Shares
Selling away shares is another way to increase liquidity, though not always equal to the total value of shares sold, but some liquidity would be released whenever a share position is sold.
Example: [2 Aug 24] Sold Shares To Save Liquidity
What I Will Do Next?
What I am going to do next is to continue to raise funds from elsewhere to increase the excess liquidity for my account and these fund sources include:
Selling Away Dividend Stocks
I have a dividend portfolio which I intend to build to S$100k for long-term passive income investing but at a crisis, this portfolio will have to make sure for my contingency plan.
Selling Away Bonds
I have some money parked in Savings Bonds for emergency purpose and in a crisis like this, I had to dig into the reserve to help save my account from getting liquidated.
Money From Salary
I am also eagerly waiting for payday, which happens on the 15th every month, and to use whatever savings that I have left after deducting my expenses, to prepare the cash to top up into my brokerage account.
Use Above Methods
On top of trying to raising funds, I will use the above methods to increase the excess liquidity as I wait for the extra cash to come in.
Concluding Thoughts
From my experience, a liquidity crisis can arise when we are highly leveraged (using margins to trade) and too heavy on certain positions (which causes a huge margins deficit when the share price plunges). So, if you are highly leveraged or heavy on a particular stock, I hope you will manage your risk and take necessary precaution. If you are also facing a liquidity crisis due to the marking falling hard recently, then I hope you find this article useful and find comfort that you are not alone. We will get through this eventually, keep the faith!
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