OPENING: XLU DEC 2ND 45/48.5/48.5/51 IRON FLY
Updated
The underlying implied volatility in XLU is not very high, but it's high relative to where it's been the last 52 weeks (currently, 72 (Dough 52-week implied vol percentile)).
Here are the metrics for the setup:
Probability of Profit: 43%
Max Profit: 175/contract
Max Loss/Buying Power Effect: 175/contract
Break Evens: 46.75/50.25
Notes: As you can see, this isn't a very high probability setup. Basically, it's a risk one to make one. The notion here is to take maximum advantage of the at-the-money premium as you would with a short straddle, which -- like an iron fly -- is a short volatility strategy. If you sell your short options farther away from current price, as you would with an iron condor, your probability of profit increases, but your profit potential decreases because the out of the money strikes bring in less premium.
From a price action standpoint, you're looking for price to stay within your break evens and ideally for volatility to collapse somewhat running toward expiry.
Unlike an iron condor or short strangle, I look to manage at 25% max profit.
Here are the metrics for the setup:
Probability of Profit: 43%
Max Profit: 175/contract
Max Loss/Buying Power Effect: 175/contract
Break Evens: 46.75/50.25
Notes: As you can see, this isn't a very high probability setup. Basically, it's a risk one to make one. The notion here is to take maximum advantage of the at-the-money premium as you would with a short straddle, which -- like an iron fly -- is a short volatility strategy. If you sell your short options farther away from current price, as you would with an iron condor, your probability of profit increases, but your profit potential decreases because the out of the money strikes bring in less premium.
From a price action standpoint, you're looking for price to stay within your break evens and ideally for volatility to collapse somewhat running toward expiry.
Unlike an iron condor or short strangle, I look to manage at 25% max profit.
Note
TastyTrade has done some studies on iron flies, including their setup and management (e.g., what environments to put them on in (high IV), where to buy the long options of the setup (16 delta), when to take profit (25%), as well as broken fly management (roll tested side out as is for credit; sell untested side against). See TastyTrade.com (search for "iron fly").Note
As you can see, struggling to get back above my lower breakeven. I looked at various things here to "improve the situation" -- rolling the short call down; rolling the short call vert side down as a unit; hedging, but just couldn't get jack for doing any of those things, so I'm going to let the probabilities play out here and roll it out toward expiry if things don't improve.Note
Covering the short call here for a .05 db (near worthless). The long call is no bid, so nothing to do but leave it on to expire worthless.Note
Will roll out the short put side as is and sell an oppositional side against.
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