Trading would be simple ifstayed high and we could knowing that the actual move would always be within the range of the . That’s a fantasy. The reality is that when we establish trades such as and the directional movement may force us to . We can the untested side towards the current price. We can roll out in time using an option with a later . We can also go . What exactly does it mean to go inverted? Why do we do it? What are the mechanics? How does it impact our P/L targets?
A graphic of rolling up the untested Put side of a Short Strangle closer to the underlying price was displayed. Should the underlying continue in one direction past its expected move, you may have to roll up the untested Put higher than your Call strike. An example of a short Strangle in XYZ stock that went inverted was displayed. The example showed the initial strikes, the roll up and the inversion. A graph of the P/L on the original trade, roll up and inverted trade was also shown.
Now that we have explained how we established this inverted position, how do weit? Our potential profit is equal to the total in credits we have received minus the width between the strikes. We look to manage this inverted spread at somewhere between 50% to 75% of potential profit. A table of an inverted trade managed at 66.7% of max potential profit was displayed. The table included the total credit, width of inversion, max profit, profit target and level at which to take the profit.
Tom noted, “this will show you why we keep the dream alive, because more times than not we reduce the loss byand by allowing the underlying to be cyclical.“
For more information on Getting Inverted see:
From Theory To Practice from June 13, 2016:
Best Practices from July 6, 2016:
Watch this segment of Best Practices withand for the valuable takeaways and a thorough understanding of why and when we go inverted and how to manage the trade.