Investment Success: Leverage Liquidity To Your Advantage 2023

The investment approach in fundamental principle is to look for liquidity when trading volatility. Investors and traders often benefit

significantly more from assets with a high degree of liquidity than those with a lower level of liquidity.

Investment-related fields

On a broad scale, this similar concept can be utilized in other investment-related fields. Investors, for instance, are probably much

more likely to feel at ease buying a home in a place with a dense population than in one with a sparse one. When there are more

typical transactions per year and more people looking, it is much simpler to sell a home.

The world of possibilities can be governed by the same rules. Trading high volume investment options has a number of

additional significant benefits as well. A recent Best Practices article is a great place to start if you want more details on this

subject.

On the show, the hosts highlight some of the most important liquidity filters that traders can use when selecting the appropriate

underlying, including: High volume (across strikes,High open interest (across strikes), A tight bid-ask spread, Multiple expiration

cycles, Numerous strikes

Cost to buy an option

The compression of the bid-ask spread is typically the biggest benefit to investment trading highly liquid securities, even though

each of the bullet points above is significant in and of itself. The difference between the cost to buy an option (at the offer price)

and the cost to sell an option is known as the bid-ask spread.

The bid-ask spread, for instance, equals $0.30 if the bid for an option is $0.50 and the ask is $0.80. The fair market value of this

hypothetical option is $0.65 if we assume that the midpoint of the bid-ask represents fair value. This puts a trader who pays $0.80

to buy the option at a disadvantage right away because they already overpaid by $0.15 to begin the transaction.

A trader selling the option for $0.50 may also make the same argument. Since the bid-ask spreads on highly liquid options are

typically smaller, traders lose less advantage when taking a position.

The option on the right’s bid-ask spread, enables traders to initiate the position without considerably buying above or selling

below fair value. You can see how trading out of a position might benefit from a narrow bid-ask spread.

This Best Practices article provides an overview of tastytrade’s own liquidity rankings and explains how traders may utilize them

to find appealing opportunities and steer clear of potential traps.

Crucial factors Liquidity

One of the most crucial factors in determining opportunities in a market is liquidity. Liquidity is fundamentally the result of traders’

opinions on the market being expressed collectively.

These opinions are reflected in a futures market, like any other market, by open investment interest, or by buy or sell orders that

have been conveyed to the rest of the market but have not yet been filled. The important thing to remember is that the more

opinions that are expressed in the market, the more liquid the market is, regardless of the quantity and cost of these orders.

Because more participants and opinions are expressed on the market, the more likely it is that a single trader, like yourself, will

come across another with a different point of view and come to an understanding on a quantity and price to trade. This is why

liquidity is such a crucial component of market opportunity.

Current asset ratios shed light on the state of a business. in particular, its capacity to meet short-term obligations. The better a

company is able to meet its short-term obligations, the higher its liquidity ratio. In contrast, this is true for businesses with low

liquidity ratios.

Risks Associated With Liquidating Inventory And Receivables

Receivables and inventories, out of all the current assets, can be the most risky and take the longest to dispose. There will

virtually always be a portion of our receivables that we are unable to collect. We shouldn’t rely on the value of the receivables as

the complete cash conversion since allowance for dubious accounts should offset the amount of lost receivables.

We are totally at the whim of the customer when it comes to the liquidation time of receivables. Clients may pay promptly, after

the fact, or not at all. When it comes to liquidation, inventory is a more extensive procedure than receivables. We rely on

consumers to buy our product at the advertised price. Before a customer makes a purchase, there is a trip to get them into the

store.

On that journey, many things could go wrong. We need to account for a certain percentage of returned or damaged goods,

assuming a consumer really makes the transaction. It’s fairly typical to permit credit purchases. In this instance, after the sale is

made, we must wait a set amount of time before collecting money.

Of course, this poses the same risk as receivables (i.e., no payment). Certain inventory can be challenging to transport in specific

situations (i.e., sale). Making the inventory available to customers at a discount might be a first effort.

If that doesn’t work, we should think about selling to a wholesaler. This usually entails further marking down the inventory. The

inventory is currently being sold for a significant discount from its original price.

Liquidity Will Replace Fixed Assets

In today’s fast-changing economic landscape, liquidity is replacing fixed assets as a key driver of financial success. Traditionally, industries like construction and manufacturing relied heavily on fixed assets such as machinery, real estate, and infrastructure. These tangible assets were often considered valuable collateral for securing loans and financing business operations. However, the financial sector’s perspective has shifted, placing greater emphasis on liquidity over asset ownership.

Banks and financial institutions are now prioritizing liquidity over hard assets when evaluating a company’s creditworthiness. As a result, businesses that traditionally relied on their asset-heavy balance sheets may need to rethink their strategies. Instead of purchasing equipment outright, many companies are turning to leasing and rental models to maintain cash reserves and improve financial flexibility.

Leasing vs. Ownership: A Strategic Move for Liquidity

One of the most effective ways to enhance liquidity is to lease rather than buy. Businesses that lease equipment or real estate can preserve capital, reduce financial risk, and adapt quickly to changing market conditions. Leasing also minimizes the burden of depreciation and maintenance costs, allowing companies to allocate funds toward growth, innovation, or expansion efforts.

Additionally, businesses that already own fixed assets can unlock liquidity by renting out their underutilized equipment or properties. This approach generates cash flow without requiring the sale of valuable assets, ensuring companies remain financially agile.

Working Capital: The Key to Financial Flexibility

Liquidity isn’t just about having cash on hand—it’s also about managing working capital efficiently. Working capital, defined as current assets minus current liabilities, represents a company’s ability to cover short-term expenses while funding growth. Maintaining healthy working capital levels is essential for ensuring smooth operations, meeting financial obligations, and taking advantage of strategic opportunities.

Many businesses track working capital as a percentage of revenue, using industry benchmarks to determine optimal levels. A well-managed working capital strategy allows companies to navigate economic downturns, invest in high-return opportunities, and sustain long-term profitability.

The Competitive Advantage of Liquidity

In an unpredictable business environment, financial flexibility is a competitive edge. Companies with strong liquidity can seize opportunities faster, whether through strategic acquisitions, rapid expansion, or market investments. The ability to deploy cash quickly can differentiate a business from its competitors, especially during times of economic uncertainty.

By prioritizing liquidity over fixed assets, businesses can position themselves for long-term success, financial resilience, and sustainable growth in 2023 and beyond.

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