This segment reveals the results of a study on Iron Butterflies, a defined risk trade allowed in an IRA account and which out-of-the-money (OTM) options are best to use along with under what circumstances it is best to trade these positions. Every trader can learn from the information here.
As tastylivers we are premium sellers. One of our favorite strategies is to sell straddles but since non defined risk trades are not allowed in an IRA account. We can convert a short straddle to an Iron Butterfly by selling the OTM wings. The study tested the delta levels to use and how the trades worked under different volatility levels.
A study was conducted using the SPY (S&P 500 ETF) from 2005 to present. We sold one Iron Butterfly each week (497 occurrences). We then compared strategies with long strikes (the wings) at the 16 delta and the 5 delta. A table of the results of using the 16 delta wings and the 5 delta wings were displayed. The results included the percentage profitable at expiration, average P/L, largest profit and largest loss.
A second study was conducted using the SPY from 2005 to present. We sold one Iron Butterfly each week (497 occurrences). We then compared strategies with long strikes (the wings) at the 16 and the 5 delta and further compared those choices when the VIX was trading under 20 and when it was trading above 20. The results displayed included the percentage profitable at expiration, average P/L, largest profit and largest loss.
Watch this segment of “Strategies for Your IRA” with Tom Sosnoff and Tony Battista for the takeaways and to which delta to use for your long strikes and under which volatility level it is best to trade Iron Butterflies.
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