Iron Fly

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Directional Assumption: 

Neutral

An Iron Fly is essentially an Iron Condor with call and put credit spreads that share the same short strike. This creates a very neutral position that profits from the passage of time and any decreases in implied volatility.

An Iron Fly is synthetically the same as a long butterfly spread using the same strikes.

When to Run It

I am anticipating minimal movement of the underlying stock.

Setup

  • Sell a short at the money Straddle
  • Buy one long out of the money put
  • Buy One long out of the money call
  • Adjust the long options to where the max profit equals the max loss.

NOTE: all options have the same expiration month.

Timeline

30-45 days

Ideal Implied Volatility

** 50% or greater**

Short Iron Fly profits are realized when volatility contracts and we are able to purchase the spread to close for less than the initial credit received.

Profit Target

Winner : If my position shows a profit near 25% of the max potential gain, I will close the position early to lock in profits.

Loser: I will close the position at 2 x’s the credit recieved if it moves against me.

Time Decay

As time goes by theta works doubly in my favor as I collect premium on both the options that I sold as long as the price stays within the strikes.

Maximum Profit

Potential profit is limited to the net credit received.

Maximum Loss

This is a defined risk traden.

Upside: Short Call Strike + Credit Received

Risk Management

This trade can be scaled up to 3-5% of my account.

Categories: Strategies