We have examined and studied in detail such Delta Neutral and undefined risk strategies such as short Straddles and short Strangles. We have also closely studied and examined Iron Condors in which we add long Put and Call wings to define our risk on a short Strangle. An Iron Fly is created by adding out-of-the-money (OTM) wings to a short Straddle. We decided this strategy needed a closer look. What should our ideal strike width be and what percentage should we use when managing winners to optimize profits?
A P/L graph of an Iron Fly was displayed. It appeared unbalanced because of the effects of Volatility Skew. Tom noted, “There are many people that like the concept of selling premium but are very nervous with undefined risk. The Iron Fly is an interesting alternative that can be used with either a certain Delta or strike width.”
Our study was conducted in the SPY using data from 2010 to the present, approximately 32,000 trades. We sold an Iron Fly every trading day and compared ones with the Put and Call wings being based upon a 10, 16, or 30 Delta. We also tested managing winners (if possible) at percentages of 25%, 50% and 75% of max profit or simply holding until expiration.
Tables of the results showed that the 10 Delta wings managed at 25% had the best average P/L and average P/L per day. Tom commented, “You take less risk, manage earlier and you make more money. That’s all there is to it.” Two graphics were shown comparing Iron Flies comprised of 10 Delta Wings when managed at 25% of max profit versus simply carried to expiration. The visualization demonstrated the clear superiority of managing winners.
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"
Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the valuable takeaways and the results of our study on the ideal Delta based width to use for the wings on an Iron Fly and the percentage to use when managing winners.
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