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Iron Flies: Straddle Profit Targets

| Dec 6, 2016

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Market Measures

Iron Flies: Straddle Profit Targets

Dec 6, 2016

A short Straddle is not only an undefined risk trade it’s also one of our favorite strategies for selling premium, especially in high Implied Volatility (IV) environments. Some traders prefer the Iron Fly because the margin is lower or because they are trading in in IRA account and therefore can’t be short the Straddle. The question then becomes, when managing winners at 25% of max profit do we do that at the credit for the Straddle or the net credit for the Iron Fly which is the Straddle credit minus whatever we paid for the wings?

Our study was conducted in the SPY using data from 2005 to the present. We chose the option expiration cycle closest to 45 days to expiration (DTE). We compared the short at-the-money (ATM) Straddle with a 50 Delta Call and a 50 Delta Put, to a short Iron Fly comprised of the same Straddle plus a long 10 Delta Call and long a 10 Delta Put at the wings. We managed trades at 25% of max profit if possible. We used two different criteria for max profit for the Iron Flies. One was the total credit received for the Straddle and the other was the same minus the cost of the wings.

A results table compared the average credit, success rate and average P/L of the Iron Fly managed at Iron Fly profit target, the Iron Fly managed at the Straddle profit target and the short Straddle. Waiting for the Iron Fly to reach the Straddle target resulted in a decrease to the win rate with little change to the average P/L. A second table compared the days held for each strategy. Waiting for the Iron Fly to reach the Straddle target ultimately led to holding the trade longer.

Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the valuable takeaways and and results of our study on the optimal profit targets to use when trading Iron Flies.

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