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:
- 2005 - 2018
- 45 Days to Expiration
- Held to Expiration
- 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.