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.
- 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.
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.
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.
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.
Potential profit is limited to the net credit received.
This is a defined risk traden.
Upside: Short Call Strike + Credit Received
This trade can be scaled up to 3-5% of my account.