This segment reveals the results of study to see if buying dynamic Iron Butterflies in a low implied volatility environment is a profitable strategy or not. This should be of interest to all traders.
The Market Measures segments on April 23rd and 28th featured studies which tested the concept of selling iron flies with “dynamic wings,” meaning wings that were placed at a certain probability of expiring out-of-the-money (OTM) as opposed to a fixed distance away from the short strikes. Specifically, it would be buying an 84% OTM put, selling an at-the-money (ATM) straddle and buying an 84% OTM call.
This study tested the opposite position, short the wings and long the body. The strategy was tested with no IV rank filter, as well as filtering for two different levels of low IV rank and we also tested managing winners in each scenario.
A study was conducted from January 2013 to present using the SPY, IWM and TLT. We bought an Iron Fly with the wings placed at 84% out-of-the -money (OTM) on the first trading day of each month closest to 45 days to expiration (DTE). We recorded the P/L at expiration as well as managing at 25% of max profit. We bucketed the results with no IV Rank filter, below 50% IV Rank and below 35% IV Rank.
A table displayed the results of all three strategies at 25% of max profit and at expiration. The table showed the P/L, percent of profitability, percent of profitability at expiration and average trade P/L for no IV Rank filter, IV Rank below 50% and IV Rank below 35%.
Watch this segment of "Market Measures" with Tom Sosnoff and Tom Preston for the takeaways and to see what the hard data shows about going long dynamic Iron Flies in a low IV environment.
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