Inversion refers to selling puts above calls, or calls below puts, when managing a short position. Inverted strategies are rare, and we avoid them at tastytrade unless they are absolutely necessary and increase our probability of success. We won’t look to open a position with an inverted setup, but there are times when inversion may result from adjustments we make to our current trades, especially after large outlier moves.
To make a profit selling inverted strangles for example, we still want the price of the stock to remain inside of our short strikes. The difference here is at expiration, when our short options will hold all of their intrinsic value since they would be ITM. For this reason, we would want to trade them instead of letting them expire to avoid exercise fees. With this strategy we are still extracting as much extrinsic value as possible, and this strategy is usually used to reduce our initial loss on a position or potentially break even.
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