We believe in selling option premium, including naked options, especially in high Implied Volatility (IV) environments. Perhaps our favorite strategy is selling the 1Standard Deviation Strangle. There are some traders who prefer shorting Straddle over Strangles, largely because of the greater credit received for selling at-the-money (ATM) options. Unfortunately, neither Strangles nor Straddles are permitted in IRA accounts because of the naked call and the margin expense is higher because the put must be cash secured. The solution for Strangles is the Iron Condor. The solution for the Straddle is the Iron Fly. Today we delve into a specific kind of Iron Fly, the Dynamic Iron Fly.
A Short Straddle is a position of a Short ATM Put and a Short ATM Call. An Iron Fly adds “wings” to this position in the form of an equidistantly placed Long Call and Long Put. The Dynamic Iron Fly still adds the Long Call and Long Put but instead of a fixed distance between the short and the long options, both the Call and Put are selected by using the strike with the Delta closet to 16, the 1 Standard Deviation move. Because of Volatility Skew the Long Put will be farther away than the Long Call. We ran a study of the Dynamic Iron Fly in the SPY (S&P 500 ETF) from 2005 to the present. Using options with 45 days to expiration (DTE) we sold Dynamic Iron Flies and compared holding to expiration versus managing at 25% of max profit (or holding to expiration).
A table of the results of the Dynamic Iron Flies held to expiration or managed at 25% was displayed. The table compared the average P/L per day, percentage of winners, average duration, average daily P/L and biggest loss. The table showed that managing at 25% was better in every metric. A second table compared managing Dynamic Flies at 25% when Implied Volatility Rank (IVR) was above 35% and all trades. The table showed that waiting for high IVR resulted in higher P/L per day and per trade as well as lowering the duration in the trade. A final table compared Straddles to Dynamic Iron Flies when IVR was above 35%. The table showed that Straddles had better returns and win rates although the losses on Straddles were much larger than Dynamic Iron Flies. Tom and Tony mentioned that Dynamic Iron Flies cap the risk and are a great alternative to people afraid of a market Black Swan event.
For more on Dynamic Iron Flies see:
tasty BITES from May 19th, 2015: “Earnings | Dynamic Iron Flies”
Market Measures from July 2nd, 2015: “Risk Reduction | Adjusting Dynamic Flies”
Market Measures from August 7th, 2015: “Low IV | Buying Dynamic Iron Flies?”
Market Measures from October 1st, 2015: “Dynamic Flies | Weekly vs. Monthly”
Watch this segment of Strategies For Your IRA with Tom Sosnoff and Tony Battista for the important takeaways and the study results on Dynamic Iron Flies that were tested and managed at 25%, filtered for higher IVR situations and compared to Short Straddles.
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