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Iron Fly - Volatility

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.

We often define the risk of strangles and straddles by purchasing further OTM wings to reduce the buying power requirement. When we buy wings to define the risk of a straddle the trade is called an Iron Fly. These strategies provide a high potential return on capital because of the large credit, but tastytraders know it's not always just about ROC we also need to consider the volatility of the position.

The Study:
  • SPY
  • 2005 - 2018
  • 45 Days to Expiration
  • Held to Expiration
  • Compared:
    • 1, 5, 10 Wide Iron Fly

In addition to an attractive theoretical return on capital, Iron Flies also provide a very high realized ROC for 1, 5, and 10 wide wings. However, because of their low probability of profit, they also have a very high volatility. One way traders can reduce this volatility is to widen the wings. A wider Iron Fly has a lower volatility than the narrow Iron Fly. Additionally, incorporating a management technique such as managing early reduces the volatility.

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