Knowing how to use it will protect you from gaps, intraday spikes, and 10x your hedging experience. Here’s the step-by-step guide:
Here’s what you’ll learn in this thread:
1. What is an iron fly
2. Perks and Drawbacks
3. What should you do when you are in profit?
4. How to adjust when in loss?
5. Thread on How to keep shifting an iron fly for max credit? 6. Risk-free trade benefits Let’s dive in ↓
What is an iron fly?
Sell ATM CE and PE (Short straddle) Buy OTM CE and PE (Hedge it by buying on both sides) Look at the picture below for an example of an iron fly in current weekly options.
2 -Why do traders like iron fly?
Many traders want to receive maximum theta or max credit. This is why they sell straddles. But straddles have unlimited risk in them, and can’t handle gaps or intraday spikes. This is why traders like knowing the maximum loss in their trades.
3- Perks of Iron Fly Low capital required
—Possible to buy first, sell later Limit losses
—Know your maximum loss upfront Adjustments
—Can reduce losses to zero or almost nothing Weekly earnings
—Possible every week Jackpot
—Potential for a jackpot if it expires in the middle.
4 – Drawbacks of Iron Fly Low Probability
—If you want a low max loss, the probability is less than 30% Higher Brokerage costs
—Since there are 4 legs and then you will add 3-to 4 more to adjust costs will be higher Slippages
—Want to free margin from ITM strikes, slippages are high.
5- Price action
Apply price action and combine your strategy with your view and technical analysis.
If good in technicals, then can increase the odds of success. This will fetch you more money than blindly selling iron flies every week. Technicals increase ROI.
6. What should you do when you are in profit?
When in profit usually, traders square off their buy legs and buy 1-2 strikes closer. The aim is to—make the maximum losses even lower than when you started the trade. Once this is very low, can even stay in the trade for a jackpot.
7. What to do when in loss?
Since the initial range is small when in loss, traders want to extend the range of the fly. They pump in more capital and open another iron fly or a broken wing fly (buy just one side and not two like an iron fly). This way the payoff becomes better.
This is not the only way to adjust an iron fly. There are multiple ways for different scenarios. Very good content on Youtube regarding this.
This is not the only way to adjust an iron fly. There are multiple ways for different scenarios. Very good content on Youtube regarding this. I will have to do another thread on just the adjustments.
Directional Iron fly – I already mentioned that if you are good at technicals you can use iron fly to have a very good risk-reward trade on your hands. For eg, in the current week, if your view was bullish instead of selling ATM straddles, you sold 4-5 few strikes above ATM.
THREAD ON IRON FLY – >
These days the most preferred strategy for option sellers due to improved margins is IRONFLY. It’s essentially a short straddle with a long strangle. Long strangles act as ‘WINGS’, which help in capping the unlimited risk associated with a short straddle.
You can also view the position as a combination of Cal & Put credit spreads if that makes it more easy for you.
There are 3 important things to understand while trading this strategy:
1) Initial size of the Wings
2) Risk Management
3) Adjustments
Since we are selling an ATM straddle, the 1st question is how far our wings should be? Ideally i sell .50 delta straddle & buy .20 or .10 OTM strangle, depending on my view on volatility. So the distance of wings depends on the IV setup. Higher the IVs, greater the distance.
If you don’t understand greeks, then ideally with 30 days to expiry (dte), wings should be around 300pts either side. If your trading in weekly then it should be not more than 200pts. Higher the premiums, higher the distance as we have more cushion of theta.
It is important to understand that we need to reduce the distance of wings with time so as to manage our RISK in gap openings or sudden volatile move. So for eg. if you started with 300pt wings with 30dte, the wings wouldn’t give the same protection when there is 7dte. (5/n)
So as the premiums decay, we need to gradually reduce the distance of wings. Now on to ADJUSTMENTS. When the index moves it is important to also move with it in this strategy. This is because if we don’t then the initial credit received will reduce drastically. (6/n)
An example. Nifty is trading at 13500. You sell 13500 straddle & buy 13800-13200 strangle. If Nifty moves 200pts up, your sold straddle will have lesser theta value & your strangle will have higher as 13800 cal will increase. So your overall credit will drastically reduce. (7/n)
So if market moves one direction, one sold option becomes ITM (means less credit) & one wing comes closer to ATM (means higher debit). So the overall theta received becomes less or even nil. That’s a practical problem which is why adjustment is required to receive max theta.
For how to do adjustments, best way is to treat Ironfly as a straddle with added protection. So try to keep the straddle near to ATM & when the wings are tested only then adjust them. This way you’ll always have maximum credit received which is important in this strategy.
What i have explained is a neutral approach on how to trade Ironfly with max credit received. Many try to trade it by exiting the losing leg & keep a TSL on the winning leg. Personally I’m not a fan of this way but that’s because I don’t want to trade direction like this.
Many advocate Ironfly as an easy 4% strategy. It’s not. Requires expertise in when to adjust & how much the wing size should be. With experience such issues can be dealt with. Overall it’s a good strategy specially for those who want to take less risk with limited capital.
How to adjust when a wing is tested? Example Nifty @ 13500, our position: 13500 short straddle 13800-13200 long strangle. So when index reaches 13700, our straddle will be shifted from 13500 to 13600 to 13700. We need to re-center our long strangle now.
So we can exit 13800-13200 & take a new strangle of 14000-13400 or if the premiums have dropped & we need to reduce our wing size, then 13900-13500. Here aim is to receive max credit, so as when or where the market gives good decay, we are ready to seize the opportunity.
Above is just an example. During volatile moves we don’t need to adjust at all, because slippages can be high & our wings are there to protect. Only when nifty breaches a level (subjective), where our credit received has reduced drastically, that we need to do the needful.
Benefits of risk-free trade Can wait for a jackpot Avoid getting out early with small profits, he believes if you book the strategy out fully in small profits over the long run hard to make money as we take full losses when wrong.
Questions 1.Why do you sell an iron fly every Wednesday? What are the perks of doing it versus selling naked?
Ans- I sell strangles 99% of the time. No hedge.
Question 2.Which one is a better strategy to make more money on Thursday’s opening?
Ans- 1. In iron fly we know the max loss limit but in naked strangle we dont know the limit.
2. Iron fly almost gives 1:3 risk reward and if you are good in adjustments then its easy to avoid risk easily but in strangles risk reward is 1:Unlimted
Question 3- How to make use of an iron fly on Wednesday before expiry day?
Ans – Sell next week straddles as they will have huge premiums. Buy current week options to hedge them as they will be very cheap. If anywhere near the centre can make good money.