Anis the combination of a short at-the-money (ATM) and a long out-of-the-money (OTM) (referred to as "wings"). Buying the OTM strangle converts the short straddle from an trade to a defined risk trade.
The "dynamic" part of the trade stems from usingto choose the strikes of the long options. This method incorporates , as puts generally trade more expensive than calls, leading to further put strikes than call strikes when using the same probabilities on each side.
A study was conducted from 2002 to present using GLD (Gold ETF), SPY (S&P 500 ETF), IWM (Russell 2000 ETF) and TLT (Bond ETF). We entered positions each trading day in the expiration cycles with close to 45. We sold the ATM Straddle and bought the 10 Delta Call and Put. We then compared to holding the trades until .
A 10 year graph of the S&P 500 versus the Iron Fly P/L was displayed. The graph showed that the Iron Fly performance tends to follow the market under normal conditions, outperforms in choppy cyclical markets and performs poorly in strong, trending markets (2008 and 2013).
For more on Iron Flies and Dynamic Iron Flies you can check out our archives:
- tasty Bites from May 19th, 2015:
- Know Your Options with LIZ and JNY on May 29th, 2015:
- Market Measures from July 2nd, 2015:
- Market Measures from August 7th, 2015:
- Bat vs Bat from January 13th, 2016:
- Market Measures from April 1st, 2015:
Watch this segment of “Market Measures” for the important takeaways and the study results indicating the best management of the Dynamic Iron Fly.