In this strategy workshop, Liz and Jenny explain the basics of a Short Iron Fly. This spread consists of a short Straddle while simultaneously purchasing an OTM (Out Of The Money) Call and OTM Put option to define the risk of this spread.
We place Iron Flies in very liquid underlyings that have high implied volatility rank (IV rank), because we are able to collect a larger credit in high implied volatility, as the option prices are inflated. Generally, we consider anything with an implied volatility rank of over 50% to be high.
This is a neutral strategy, meaning that the spread profits when volatility contracts and the price of the stock stays within a tight range.
When we trade Iron Flies, we hope that the price of the underlying will pin at our short strike, and that we can buy the Iron Fly to close for a price smaller than the credit received.
See more on this strategy here
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