How to Calculate Liquidity Ratios: Current and Quick Ratio Formulas

Hey everybody

Just finished F2 ratio lecture in Becker, and my eyes pretty much glazed over. I have a good feeling this is going to be a problem spot for me. How do you remember ratios easily and what they are measuring?

Thanks,

Tastytrade recommends a target of .05%-.1% theta relative to net liquidity for a delta neutral options portfolio. They also recommend never more than .2% as the gamma risk becomes too great. On a $100k portfolio that means 50-200 portfolio theta.

Curious what people target or currently run with here. I imagine with a lot of people wheeling it is probably higher.

Hey guys, I have been trading ~2 months now, and I have learnt about FVGs, trend lines, but I don't understand liquidity. I have tried to understand it, but it is something that has always left me confused. Can anyone help me understand it?

Hi, is there a way to determine liquidity for options? I am writing algo (ha :-D ), and need to determine which options will be bought and sold with no problems very quickly. I plan to scalp tens of options, maybe lower hundreds.

Let us understand an easy matrix to understand how the company you are planning to invest is healthwise, and to understand this one of the simplest parameter is liquidity.
Liquidity: “consisting of or capable of ready conversion into cash”

(Merriam-Webster Dictionaries, 2012)
An important parameter of liquidity is current ratio and it measures how easily a business can pay short-term liabilities with short-term assets.
Why is it important?
Current Ratio is important because if you can't pay your short-term liabilities you are out of business; thus the result of the ratio is also general indicator of the safety or security of the business. A high Current Ratio generally means a more secure business.
The Formula:
Current Ratio = Current Assets / Current Liabilities

Where do we find the information for this ratio?
Current Assets: In the Balance Sheet
Current Liabilities: In the Balance Sheet
How it matters?
Say you find that the stock you are planning to buy has a current ratio of 1.5, simply put your current assets can be used 1.5 times over to pay current liabilities. That is your company can pay its debt 1.5 times over by its liquid assets (i.e by selling its products)

Source Ref: Ratio Analysis Fundamentals By: Alex Tracy

******Disclaimer*******
I am not a SEBI registered analyst or RIA, just an investment enthusiast this post is solely made for educational purpose

Liquidity is so weird to me. I trade with stocks and have trouble understanding the concept of banks making more money from getting rid of other traders. like I know how to spot liquidity by looking at wicks on a chart, but I have trouble wrapping my head around the concept. if a buyer loses a trade, how does his lose benefit a banks trade?

and more importantly, how do I know when and where banks trade? is it more news based? or a 24/7 thing? what stocks do they invest in? is there resources that can help me figure that out? any feedback is welcome thank you to this community for helping!

Most people overcomplicate liquidity. At its core, it just means: where are the orders sitting, and how easy is it to get filled without moving the price?

Think of it in two layers:
- Market liquidity: tight spreads, deep order book, you can move size without slippage. SPY has it, a random penny stock does not.
- Liquidity pools (price action lingo): clusters of stops and resting orders. Price hunts those levels because that is where the fuel is. The classic example is price wicking above a recent high, triggering breakout buys and stop-losses, before reversing.

So when people talk about “trading liquidity,” they usually mean one of two things: either which products are efficient to trade (bid/ask depth), or how price is drawn toward stop clusters and imbalance zones.

You do not need to mystify it. Liquidity is just the water in the pool and sometimes you surf it, sometimes you drown in it.

Where did you see tasty recommend 0.05-0.1%? I saw a couple Dr. Jim videos that are just a couple years old in which he says 0.1% (conservative side) to 0.5% (more aggressive)

Check to see if the volume is above 0 at small time scales for the contract you're interested in and the neighboring strikes. If you are scalping then make sure the volume will be there when you hope to exit too.

Obviously, I know that assets minus debt equals net worth.

However, I've noticed on this forum that some people will say things like, "1M NW" and then mention that they also have a mortgage of $300k, which to me would mean $700k NW.

I'm wondering if there is a mindset thing, a cultural thing in this forum, or an established financial norm to speak of assets as being net worth.

Secondary question, I'm also wondering what people count when they say "liquid" assets, because I also notice that seems to change sometimes. Cash, sure, but CD's? IRA / 401k? Real estate? Where is the line from liquid to illiquid?

So, what are your thoughts here? I don't think there is a right or wrong, but I've noticed differences and I'm curious to hear more about people's thinking!

If you find it helpful, please let me know will write about other helpful financial ratios

Think about where the majority of traders place their stop-loss orders:

• Right above a recent high
• Right below a recent low

These clusters of stop-loss orders are "liquidity pools."

Large market players (like banks and institutions) need to trigger these orders to be able to fill their own massive positions. Because of this, the price is often drawn to these areas like a magnet just before a major move in the opposite direction.

A simple rule is to expect obvious highs and lows to be "raided" by the price to grab this liquidity.

Liquidity is a mixture of resting orders (think an order made above or below the price to buy or sell, it’s also limit orders placed in around the price).

It sits there until price moves into it and your trade then executes.

Some areas of liquidity are thicker than others, i.e there’s more people placing resting orders at that level so it’s harder for price to move thru it.

Market orders are what moves price. When price moves into an area of very thick liquidity, it needs buying pressure from market order participants to break thru it.

0.049% at this time. Usually a little higher. But I suggest and use a slightly different formula to correct for under-invested and for over-leveraged portfolios. Instead of using net liquidity, I use Securities Gross Position Value in the denominator. Daily Theta / Securities Gross Position Value gives me more accurate projection of risk I took on - relative to the size of my positions.

I change the Gross Position Value relative to net liquidity separately - based on where we are in the market cycle.

Thanks this is helpful! Kindly write more

I would love to know how to calculate this on my account with ibkr

There is no such one thing as liquidity. You need to work out how you want to take then calculate it.

Polygon has endpoints for aggregate bars as well as trades. Volume as an absolute number is insufficient as one minute could have 10k contracts and then go dark for hours. You want increasing volume and increasing individual number of trades.

I’ve started my revision and am currently on Corporate issuers when I came across liquidity ratios. Now there are around 11 ratios (inventory turnover, cash ratio, cash conversion, current and quick ratio etc.) each with their own unique formulas. My question is, do I need to memorise all the formulas for all these ratios or just the important ones (please let me know what are the important ones to memorise)? Appreciate it!

I’ve seen bookmap but not sure if it will actually improve my trading as you can kind of see where liquidity lies, just not in exact numbers. Anyone know if any other ways?