The strategy we use that captures the most premium is a short straddle, but since naked short calls are not allowed in an IRA account, traders must buy an upside call to to sell a straddle. This caused us to wonder if IRA traders should purchase a downside put too, creating an Iron Fly. Additionally, if traders skewed their Iron Fly to have a bullish bias, how would it have performed?
While a short Straddle and buying an out-of-the-money (OTM) call allows IRAs to simulate a short Straddle, the strategy is capital intensive because the Short Put must be cash-secured. Buying an OTM put turns this into a short Iron Fly and increases the potential on return on capital (ROC) by reducing the buying power requirement. Also, since the market prices in more risk to the downside (known as Volatility Skew) the put will generally be farther OTM and the Iron Fly will be a Skewed Iron Fly.
Using SPY (S&P 500 ETF) from 2005 to present (about 3,000 occurrences) and using options closest to 45 days to expiration (DTE), we compared two strategies based on the average P/L, win ratio and average return on capital:
Watch this segment of "Strategies For Your IRA” with Tom Sosnoff and Tony Battista for the valuable takeaways and the results of an in-depth study comparing a Skewed Iron Fly to short Straddles with upside protection.
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