• Short 1 deep OTM (out of the money) put.
• Long 1 slightly-OTM put.
• Long 1 slightly-OTM call.
• Short 1 deep OTM call.

<Risk chart of inverted iron condor retrieved from tastytrade>

A inverted iron condor is a long strangle inside a wider short strangle. It is a directionally-neutral vertical spread (all strikes on the same date) that is long on volatility. Sometimes this is described as “going long an iron condor”. 

A trader might attempt a inverted iron condor if expecting increased realized volatility, such as if dropping below the Volatility Trigger™. A inverted iron condor also benefits from an increase in implied volatility, provided that it is closed before expiration. This is a type of strategy that is more prone to do well from many small victories. 

Advanced: A Strategy of Symmetry

Since a inverted iron condor is a simple bet on the expansion of the range, there is a case for building these with symmetrical and fixed strike wings on each side. For a trader who is simply looking for an opportunity to capitalize on a sharp move in either direction, then fixed-strike wings can make sense, even if one is a bit more expensive than the other. 

This is in contrast to credit iron condors, which often benefit from variable-length wings with strike selections based on delta. Choosing a strike based on delta is a way to harvest balanced premium on both sides with adjustments for skew, while the trader bets that the price action stays in this skew-adjusted range. 

Expert: Synthetics

Synthetically, a debit IC is a logical match for a normal condor. The structure of which is the equivalent of writing an OTM credit call vertical and an OTM credit put vertical. As mentioned in the intro, it can also be thought of as a short strangle closer to the money and a long strangle further OTM. Because of put-call parity (a logical equivalence of long calls and long puts or short calls and short puts with the right delta adjustment), this behaves the same logically and becomes a [normal] condor if using all puts or all calls. 

However, these condors are less popular than iron condors because one of the spreads will be ITM, which is generally less liquid and with a worse bid/ask spread. This strategic dynamic (of shorting options near the center and going long on protective wingtips) is a common way to express a long view on volatility, or the expectations of the underlying price to stay in a narrow range, while also having capped [defined] risk.

The inverse of this strategy would be the synthetic equivalent of a inverted iron condor except again using all puts or all calls. Translating it synthetically to a inverted iron condor, it would look like a debit call vertical and a debit put vertical. Or from another perspective, it would look like a long strangle inside a wider short strangle that is further OTM. And then to transpose it into a [normal] condor, it would use all puts or all calls. 

Strategically, the equivalent of a inverted iron condor would be used if volatility (realized or implied) is expected to increase. And a credit iron condor would be used if volatility is expected to decrease, which is similar to the expectation of the underlying remaining in a narrow range. Either way, the synthetic equivalent of a credit or debit [iron] condor has both a limited max loss and max gain.

bid/ask spread: The bid is the highest price buyers are willing to pay for a security, and the ask is the lowest price that sellers are willing to sell a security. The difference between these prices is the bid/ask spread. Highly liquid securities (having many active buyers and sellers) such as SPY usually have a bid/ask spread of only one cent, even in the premarket and postmarket. Examining the width of the bid/ask spread can be a more reliable way to gauge option liquidity than volume or OI.

credit: In an option strategy, there is a credit received from the time decay (theta) of short options or credit spreads. This is the premium which you receive and the counterparty pays for the opportunity to hold the position. The one receiving the credit gains income until the option expires but takes on risks which can lead to losses and be significant if from an open-ended position.

debit: In an option strategy, there is a debit paid from long options or debit spreads. This is the premium paid for the opportunity to hold the position. The debit also functions as the max loss of a long option position. The counterparty receives a credit as time decay income (theta) until the option expires but takes on risks which can lead to losses and be significant if from an open-ended position. 

debit spread: In an option strategy, a debit spread is one that has a net debit (upfront cost) paid for long options. This means that there is an upfront cost which must be outperformed by expiration, however there are rights instead of obligations (which keeps the option holder in control). Unless a debit spread is deep in-the-money, it would be very unlikely for the short leg to be assigned. But if it was, then that assignment would be strongly offset by the long option leg. For out-of-the-money debit spreads, they are long gamma (accelerating directional exposure), long vega (sensitivity to implied volatility), and short theta (which means the premium gradually decays the value of the option over time). This time decay is measured by a first-order Greek known as theta.

defined risk: In an option strategy, if risk is defined then it is structured so that it has a max loss (capped total loss on a trade) rather than potentially unlimited loss.

delta: A first-order Greek that measures the sensitivity of an option's price to directional movement in the underlying security. Factoring out nonlinear dynamics, the instantaneous value of one delta is worth one share of a stock. This means that if the option on a stock is 40 delta, such as a 40 delta long call or a 40 delta short put, then instantaneously it has the same profit/loss dynamics of being long 40 shares. 

ITM (in the money): An option is in-the-money if it would still have some [intrinsic] value if the option expired with the underlying price where it currently is. Being in the money is entirely about the strike price beating the underlying price. ITM options cost more than options at or out of the money; they also have less extrinsic value. Additionally, ITM options have more deltas (immediate directional risk).

IV (implied volatility): The expected percentage range over a year with 68.3% confidence. This is based on options pricing at one standard deviation. Long options benefit from increases in implied volatility and short options benefit from decreases in implied volatility. In general, when implied volatility increases it means that the expected percentage range is getting larger. When implied volatility is applied to lengths of time other than one year, then this is called the expected move.

long call: To be long (buy and hold) an option contract which has limited risk and unlimited potential gains from moves up in the underlying price. The max loss is the cost of the call. Going long on a call is a simple way to gain upside exposure to movement in an underlying security, however the underlying security (such as a stock) must outperform the premium placed on that call by the options market. In other words, a long call must beat the options market in order to profit. If closed early (well before expiration) then a long call must outpace the expected move (priced in by the options market) for a specific period of time. All long calls have long gamma and long vega but short theta. It is uncommon to exercise calls rather than simply close them for a profit, however a long call is frequently understood as a right to exercise (trade in the long call to be long 100 shares) if above the specified strike price. Synthetically, a long call becomes logically equivalent to a long put if also short 100 shares.

long put: To be long (buy and hold) an option contract which has limited risk and amplified potential gains from moves down in the underlying price. The max loss is the cost of the put. Going long on a put is a simple way to profit from  downside exposure to movement in an underlying security, however the underlying security (such as a stock) must outperform the premium placed on that put by the options market. In other words, a long put must beat the options market in order to profit. If closed early (well before expiration) then a long put must outpace the expected move (priced in by the options market) for a specific period of time. All long puts have long gamma and long vega but short theta. It is uncommon to exercise puts rather than simply close them for a profit, however a long put is frequently understood as a right to exercise (trade in the long put to become short 100 shares) if below the specified strike price. Synthetically, a long put becomes logically equivalent to a long call if also long 100 shares.

OTM: An option is out-of-the-money if it would have zero value expiring with the underlying at its current price. When an option is out-of-the-money, its entire price is made of extrinsic value, which is a premium that option buyers are willing to pay for an opportunity to make a profit.

RV (realized volatility): Shows the actual trading range of how much a stock is moving over a specific period. It is calculated based on historical movements, and measures the standard deviation, which means about how far it can be expected to move with a 68.3% chance. Another way to look at it is that 68.3% of historical moves would have fallen under what is measured as a standard deviation. Realized volatility can be applied to any length of time. It can also be used as a forecast of future [realized] volatility.

short call: To be short (sell to open and hold) a call. Unless otherwise hedged, the owner of the short call has unlimited risk and only limited potential gains, which makes this an extremely dangerous strategy in isolation. If left to expire, a short call will achieve max profit if the price ends up underneath the strike price. Shorting a call is a way to express a thesis that one is “not bullish” such as what might be justifiably the case if testing a Call Wall from underneath; being “not bullish” is different than being bearish. For a short call to be profitable, the underlying security must underperform the premium placed on that call by the options market. In other words, a short call profits when the underlying security fails to beat the options market. To be closed early for a profit, there needs to be a decrease in implied volatility or the underlying must have increased less than the options market has priced in for that specific period of time. All short calls have short gamma and short vega but long theta. Short options also come with obligations instead of rights, which means that, at any time, shares can be assigned (100 short shares for each contract); assignment usually only happens when in-the-money and near expiration). Synthetically, a short call becomes logically equivalent to a short put if the trader is also long 100 shares.

short put: To be short (sell to open and hold) a put. Unless otherwise hedged, the owner of the short put has severe risk and only limited potential gains, which makes this an extremely dangerous strategy in isolation. If left to expire, a short put will achieve max profit if the price ends up above the strike price. Shorting a put is a way to express a thesis that one is “not bearish” such as what might be justifiably the case if testing a Put Wall from above; being “not bearish” is different than being bullish. For a short put to be profitable, the underlying security must underperform the premium placed on that put by the options market. In other words, a short put profits when the underlying security fails to beat the options market. To be closed early for a profit, there needs to be a decrease in implied volatility or the underlying must have fallen less than the options market has priced in for that specific period of time. All short puts have short gamma and short vega but long theta. Short options also come with obligations instead of rights, which means that, at any time, shares can be assigned (100 short shares for each contract); assignment usually only happens when in-the-money and near expiration). Synthetically, a short put becomes logically equivalent to a short call if the trader is also short 100 shares.

skew: Volatility skew is the difference between implied volatility amounts of different options strikes on the same date. Implied volatility is the expected percentage range over one year–based on option prices–with 68.3% confidence. Skew is one of the main edges to look for in an options trade, especially on vertical spreads (all options are on the same date). Sometimes it is a penalty dragging down a good trade, but it is nonetheless important to understand the extent of how much it can challenge a trade if knowingly accepting to take the opposite side of a skew advantage.

strangle: A vertical option strategy which is long an OTM (out of the money) put and long an OTM call at different strikes (long strangle) or that is short an OTM call and short an OTM put at different strikes. Like a straddle, a strangle is a way to trade volatility. Long strangles have less accuracy and less cost than long straddles; short strangles have more accuracy and more risk than short straddles.

strike: The price that an option is based on. A long call will expire worthless if the price of the underlying security finishes underneath the strike price, and a long put will expire worthless if the underlying finishes above the strike price.

synthetics: In options, synthetics are different structures that have the same logical dynamics, including the same max loss, max profit, chance of winning, and option Greeks. Synthetics are possible because options have the property of put-call parity. For spreads, long puts can be swapped for long calls and short puts can be swapped for short calls (and vice versa) in a way that creates synthetic matches without the need of adjusting deltas with shares. On single-leg options, however, puts and calls can be swapped in the same way, but require directionally-offsetting positions in the underlying security (such as a certain amount of shares).

underlying: A reference to the immediate price of the underlying security. This is also sometimes called spot (the spot price of the underlying). The spot price is in contrast to derivatives which have option prices or [forward] futures prices.

vertical spread: Any option strategy which has all contracts expiring on the same date. In contrast to a horizontal spread (calendar) or diagonal spread (combination of vertical and horizontal strikes), vertical spreads are usually the most directional and also the easiest to manage. With vertical strategies, the main edge at play is usually skew (differences in implied volatility for different strikes on the same date). Implied volatility is the expected percentage range over the next year—based on option prices—with 68.3% confidence.

volatility: When we say volatility in trading, we usually mean either implied volatility (IV) or realized volatility (RV). Volatility-sensitive trades have the extra dimension of not only needing to be right about price, but also needing to be right about how quickly price can move (or not move) compared to what the market is pricing in. In many ways, volatility means the speed of market movement; volatility traders will make bets on whether prices will move faster or slower than expected. The overlap between IV and RV is that they are based on one standard deviation moves (68.3% confidence). Also, the slang “vol” is usually considered a reference to IV, especially as “event vol”. For clarity, it is usually helpful to specify explicitly whether we mean IV or RV.

VT (Volatility Trigger™): The VT is our proprietary indicator which detects the level below which we expect bearish feedback loops (chain reactions) to start kicking in. Above this level we expect bullish flows that lead to relatively lower market volatility. Underneath the VT, realized volatility (the expected percentage range over a period of time based on historical data with 68.3% confidence) is modeled to expand significantly. In the Equity Hub™, a similar calculation is used for what is called the Hedge Wall. 

wingtip: A wingtip is what we call the endpoint of an options strategy where it is furthest out of the money (OTM). A reference to a wingtip is always to the furthest-OTM strike in a strategy. If the main leg on a vertical strategy (both options on the same date) is a credit (a premium is received for taking on some risks and potential obligations), then a long-option wingtip protects against some short gamma risk (directional risk that can increase and accelerate). The cost of defining the risk is giving up some of the premium collected. In order for risk to become defined with main credit legs, then at least as many further-OTM long contracts would need to be written.