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.
Directional Assumption: Neutral
- Buy OTM Put option
- Sell Straddle (short call and short put at the same strike, typically At-The-Money)
- Buy OTM Call option
Ideal Implied Volatility Environment : High
Max Profit: Credit received
How to Calculate Breakeven(s):
- Upside: Short Call Strike + Credit Received
- Downside: Short Put Strike - Credit Received
An Iron Fly is a defined-risk, At-The-Money Straddle. Due to the Long Call and Put options, the Iron Fly requires much less buying power than a Straddle. At tastytrade, we generally use this strategy when we have a neutral assumption in a high Implied Volatility (IV) stock. 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.
When do we close Iron Flies?
Much like a Straddle spread, we close Iron Flies when we reach 25% of our max profit. This can increase our win rate over time, as we are taking risk off the table and locking in profits.
When do we manage Iron Flies?
Due to their defined risk nature, losing Iron Flies will not typically be managed but can be closed any time before expiration to avoid assignment/fees.
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