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Market Data provided by CME Group & powered by dxFeed Technology. Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Market Measures

Straddling with Protection

Apr 1, 2016

A Short Straddle brings in a lot of premium relative to other strategies but it is not allowed in an IRA account because the risk is not defined and there is a much larger hit to buying power for the same reason, so we decided to compare Short Straddles to Iron Flies , which are Short Straddles with long wings (long out-of-the-money (OTM) put and long OTM call) so the risk is defined. Another way to look at the Iron Fly is a combination of a short straddle and long a far OTM Strangle.

The classic Iron Fly has a fixed width between the straddle and its wings. We used a Dynamic Iron Fly though in which the put and call purchased have the same Delta, in this case a 10 delta. As the put-call skew changes the strike selection changes.

A study was conducted from 2005 to present using the SPY. Using options closest to 45 days to expiration (DTE) we compared Short Straddles to Straddles with Dynamic Protection. A table of the results of the Straddles with Dynamic Protection managed at 25% of max profit or held to expiration was displayed. The table included the average P/L. probability of profit (POP) max profit, max loss and average trading day duration. Another table compared a Short Straddle and Iron Fly that were both managed at 25% of max profit with the same metrics as the first table.

For more on Iron Flies including Dynamic Iron Flies you can check out our archives:

tastyBites from May 19, 2015: "Earnings | Dynamic Iron Flies"
Know Your Options with LIZ and JNY on May 29, 2015: "Iron Condor vs. Iron Fly"
Market Measures from July 2, 2015: "Risk Reduction | Adjusting Dynamic Flies"
Market Measures from August 7, 2015: "Low IV | Buying Dynamic Iron Flies?"
Bat vs Bat from January 13, 2016: "Staying the Course with Dynamic Iron Flies!"

Watch this segment of “Market Measures” with Tom Sosnoff and Tony Battista for the valuable takeaways and the results of our study comparing Straddles to Iron Flies for a better understanding of how they act and what might be more suitable for your style of trading.

This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.

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