Inversion

Inversion is a specific, unusual arrangement of option strike prices that can show up when a trader is managing (rolling or adjusting) an existing options position, most often a short strangle or short straddle in options trading.

In a normal short strangle, a trader sells a call at a strike above the current stock price and sells a put at a strike below the current stock price, collecting premium (cash) for taking on the obligation to buy or sell the stock if it moves to those levels. Normally the put strike stays below the call strike: puts low, calls high. An inversion happens when, through rolling one side to chase the stock's move, the strikes cross over so the put strike ends up above the call strike, or the call strike ends up below the put strike. The position still has a put and a call, but their usual order is flipped.

Traders sometimes invert a position on purpose as a defensive adjustment when the underlying stock has moved hard against one side of the trade, trying to reduce further risk or lock in a certain outcome as expiration approaches. It changes the payoff structure of the position and can affect margin, risk, and how the trade behaves if the stock keeps moving.

The nuance that trips people up is that inversion isn't a strategy on its own, and it isn't the same as simply being wrong-way on a trade; it's a structural side-effect of aggressive strike adjustments, and it typically signals a position that has been pushed hard and is now behaving differently than a standard strangle or straddle would.