We've received many emails in regards to risk and an Iron Fly. An Iron Fly is essentially a short at-the-money (ATM) Straddle with long out-of-the-money (OTM) wings. We often choose the wings dynamically, that is buying a Put and a Call with the same Delta. By adding the wings we convert this premium selling, undefined risk trade into a defined risk trade. A table laid out an example of an Iron Fly in the SPY (S&P 500 ETF). The example showed the price, strike width and total risk in the trade. The risk is the width of the strikes minus the credit collected.
Our study was conducted in the SPY using data from 2005 to the present. We chose the option expiration cycle closest to 45 days to expiration (DTE). We sold an Iron Fly by selling the ATM Straddle and buying the 25 Delta wings. We managed all trades at 25% of max profit (if possible). We also filtered our results for instances of high Implied Volatility Rank (IVR).
A results table compared the SPY Iron Fly held to expiration to managed at 25%. The table included the average width, average total risk, win rate, average P/L, average loser and return on risk (ROR). The table showed that managing positions for a profit enhanced returns relative to risk. A second table comparing the SPY Iron Fly in all environments to only when IVR was above 50 was displayed. Although the legs are wider in high IVR, there was little added risk due to the higher credit received. By entering trades during high IVR our return on Risk raised from 11% to 17% and the P/L doubled. Tom noted, “We've seen this in almost every study we've done. You manage early, stick to the script and if you can sell something in higher Implied Volatility, you do it!”
For more information on Iron Flies see:
Market Measures from August 7th, 2015: “Low IV | Buying Dynamic Iron Flies?”
Market Measures from October 1st, 2015: “Dynamic Flies | Weekly vs. Monthly”
Strategies For Your IRA from May 31, 2016: "Dynamic Iron Flies"
Market Measures from October 5, 2016: "Setting Up and Managing Iron Flies"
Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the valuable takeaways and a better understanding of the Return On Risk (ROR) for an Iron Fly.
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