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Risk Reduction | Adjusting Dynamic Flies

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.

Today, on this segment of "Market Measures", Tom Sosnoff and Tony Battista examine adjusting dynamic "fly" spreads.

tastytrade's research team recently ran a number of studies which tested the strategy of selling iron flies with "dynamic wings." That means a spread in which the "wings" of the fly spread are placed at a certain probability of expiring OTM as opposed to a fixed distance away from the short strikes (see Market Measures 04/23/2015 and 04/28/2015). As a reminder, a short dynamic iron fly is a short at-the-money straddle along with a long put and long call that are both 84% OTM.

The tastytrade methodology has been to manage winners at 25% of max profit for iron flies. A short iron fly that reaches 25% of max profit has become cheaper which means the wings which were initially 84% OTM are now likely more than 90% OTM. The study tested rolling our long OTM wings to the strikes that are currently 84% OTM for a small debit.

The study used SPY, IWM and TLT as the underlyings. The period of the study was from January 2013 to the present. The trade was placed the first trading day of the month (84 initial trades). A 45 DTE (or closest to it) dynamic iron fly was sold. If the trade reached 25% if max profit with at least 10 DTE we rolled the initial wings to the new 84% OTM levels for a small debit. A table showed the results managing at 25% of total profit, rolling our long wings when 25% of profit was reached to the new 84% level and then holding to expiration or holding to expiration with no adjustment. The P/L , percentage winners, average trade P/L (and its standard deviation) and average P/L per day were shown.

Watch this episode of "Market Measures" with Tom Sosnoff and Tony Battista for the results of this study on adjusting dynamic flies to see if you should consider adopting this new strategy to reduce risk.

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