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Iron Flies with Far OTM Protection

Market Measures

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

An Iron Fly is the combination of a short at-the-money (ATM) Straddle and a long out-of-the-money (OTM) Strangle (referred to as "wings"). Buying the OTM strangle converts the short straddle from an undefined risk trade to a defined risk trade.

The "dynamic" part of the trade stems from using delta or probabilities to choose the strikes of the long options. This method incorporates volatility skew, 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 days to expiration (DTE). We sold the ATM Straddle and bought the 10 Delta Call and Put. We then compared managing winners at 25% and 50% of max profit to holding the trades until expiration.

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:

Watch this segment of “Market Measures” for the important takeaways and the study results indicating the best management of the Dynamic Iron Fly.

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