Long Iron Butterfly Options Strategy (Best Guide w/ Examples)
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- Опубліковано 15 лип 2024
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The long iron butterfly spread is an options trading strategy that consists of buying a call and put at the same strike price (a long straddle) while also selling an out-of-the-money call and put (a short strangle). The strategy can also be interpreted as the purchase of a call spread and put spread with the same long strike.
A long iron fly makes money when the stock price makes a large movement in either direction or when implied volatility increases. On the other hand, a long iron fly loses money when the stock price remains near the long strike as time passes, or when implied volatility decreases.
In this video, you'll learn:
1. How to construct a long iron butterfly spread
2. The general strategy characteristics
3. What the expiration risk profile graph looks like for long iron butterfly spreads, as well as in-depth explanations as to why profits or losses occur at various stock prices.
4. How do long iron butterfly spreads perform when the stock price changes?
Additionally, you'll see performance visualizations for three real long iron fly trades so that you can understand how the strategy performs in different scenarios. tastytrade, Inc. (“tastytrade”) has entered into a Marketing Agreement with Project Finance(Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’ brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade and/or any of its affiliated companies. Neither tastytrade nor any of its affiliated companies is responsible for the privacy practices of Marketing Agent or this website. tastytrade does not warrant the accuracy or content of the products or services offered by Marketing Agent or this website. Marketing Agent is independent and is not an affiliate of tastytrade. - Навчання та стиль
✅ New to options trading? Master the essential options trading concepts with the FREE Options Trading for Beginners PDF and email course: geni.us/options-trading-pdf
If you move your wings in, say, one tick out on both sides you will have a narrow loss window and a large win window. Sell it as soon as it moves outside your wings, then repeat.
Ronald, do you use this strategy? If so, is it hard to get a fill when trying to sell it back?
@@johnnycastaneda2371 if youre trying to get spreads and options filled, id recommend staying above an open interest of 100 on every strike price you find. its difficult to sell back if you dont have people to sell to.
This is gold bro, absolutely make a bank on earnings week for many companies that move. Such as Amazon Google Tesla. As other comments stated. Thanks bro. I'm so glad not many people know this advanced strategy. If so it would take the value down some how.👍🏼🙏🏼
Is it still going well for you? Looking to implement it
@@Dracstar well yes and no, sometimes it would be hard to close a position and no one wanted to buy it, most if the time I would need to sell it at a loss or near a loss. But I did find put credit spreads that is 100% better. Research that. I made consistent income with that every 2 days with spy.
@@gorilla_man539 awesome, I’ll look into it. Thanks!
Awesome! thank you :)
Thanks for watching!
Do you use these on earnings plays?
@porjectfinance So let me know If I have this correct, This option expires between the Middle Strike Price and the Short Put Strike You will be assigned -100 shares of stock
If Between the Middle Strike Price and Short Call Strike then. you will be assigned +100 shares of stock?
Do I have that correct?
Great 👍❤️🇮🇳
What happens when you buy an Iron Fly and the stock rallies? Does a Margin Call happen on your sold call and you get assigned 100 shares short (per contract)? Or would the brokerage eliminate the long call to neutralize that automatically?
Also, what if you buy a Put Butterfly instead? Does this avoid the margin call risk to the upside? And is it more profitable than the Iron Fly?
When I try to set this up, my net debit is nearly as much as the width of my point spreads. ( Ex. 1 dollar point spread on both ends and I’m getting a .95 debit). That means my max profit is only 5 dollars no? What am I doing wrong? I am also just practicing set ups when the market is currently closed, so maybe it’s just not coming out right because of that.
Say a stock is at $100.
I've found I get the same graph as a "Long" Iron Condor if I
Sell 110put, buy 105 put, buy 95 call, sell 90 call. It results in a net credit and the same potential profit loss graph as a regular reverse iron condor.
But I seem to get more favorable max loss vs max profit rario this way, and theta decay seems to work with me instead of against me.
Is there a name for this? For now I'm calling it a "Short" Reverse Iron Condor vs the normal way I see a RIC presented that results in a debit.
The same thing happens with reverse iron butterfly. If I flip the puts and calls and flip the buy and sells, I end up with the same graph, but often a Lowe max loss potential.
It DOES depend a bit on the stock and volatility. I'm still muddling through it, but it seems like one is better suited for theta decay or when IV is high and the other is best suits for entering when IV is already low.
Just not sure which is which yet.
:)
If you know a proper name for it I would appreciate it. Having trouble researching it without knowing what it's officially called.
Whats the difference between a long iron butterfly vs long butterfly? Thanks!
The butterflies sure can be confusing!
A long butterfly is constructed with either all calls or all puts, and is the combination of a long spread and short spread.
Example: Long 100/105 Call Spread, Short 105/110 Call Spread (Long 1x 100 Call, Short 2x 105 Calls, Long 1x 110 Call).
You can construct the same exact position with all puts, just use puts instead of calls: Long 1x 100 Put, Short 2x 105 Puts, Long 1x 110 Put.
With long butterflies, you want the stock price to stay right at your short strike as time passes.
A long IRON butterfly is the combination of a long straddle and short strangle.
Example: Long 100 Straddle, Short 90/110 Strangle (Short 1x 90 Put, Long 1x 100 Put, Long 1x 100 Call, Short 1x 110 Call)
With a long iron butterfly, you want the stock price to move beyond one of your short strikes.
So, a long butterfly is a strategy that profits from little movement, while a long iron butterfly profits from a large movement in either direction.
To take things further, a long butterfly is the same as a short iron butterfly, and a short butterfly is the same as a long iron butterfly. The positions are only different in their composition, as regular butterflies use all calls or all puts, while iron butterflies use calls and puts.
Send us an email via www.projectoption.com/contact-us if you'd like to take the discussion further, or if you need additional help!
Thanks, chris! More power!
You're welcome!
please explain adjustments for this strategy, if the trade goes against it
If the trade goes against you just take the loss.
There are certain strategies you can use to buy out some of your legs to turn the strategy into a debit spread, long put, or long call depending on which premium is lower.
But the cost of closing your option legs and buying a new strategy will definitely be higher than just taking the loss, and you will push your break even even farther away.
This is good for earnings week
It could be a good strategy if you believe the stock price will move more than expected! Compared to buying a straddle by itself, buying an iron butterfly will have less loss potential but also less profit potential.
Since less premium is paid for an iron butterfly relative to buying a straddle, the stock price doesn't have to move as much in either direction for the trade to profit.
@@projectfinance
This should work every week on Amzn, Google and TSLA. Right?
R P that’s what I’m thinking. I’m gonna try it out and see. What I’m understanding is that if the price goes up or down you will make money.
But one thing is thinking about the IV increasing right before earnings and declining afterwards. How would that impact the strategy?
better after earnings IV crush down. Buy low sell high.
So this is just a Put Debit Spread and a Call Debit Spread and betting high movement in either direction
Exactly right.
I come from a day trading background, where the risk/reward target is 1:4 or so. All I can see in these various options strategies is more potential risk than reward over time.
Garrett,
You're absolutely right in that many options strategies (primarily options-selling strategies) have more risk than reward.
However, with lower reward relative to risk, the strategy's success rate should be over 50% over time.
In theory, an options strategy risking $2 for every $1 in profit potential should have a success rate of about 66% over time.
At the same time, a stock trading strategy risking $1 to make $4 should have a success rate of about 20% over time.
Of course, the above statements are theoretical. At the end of the day, it doesn't matter if you're trading options or stock. Traders will make money if their success rates are better than the risk/reward suggests (e.g. a trader has a 60% success rate when risking $1 to make $1), and lose money if their success rates are worse than the risk/reward suggests (e.g. a trader has a 45% success rate when risking $1 to make $1).
I hope this helps!
-Chris
Thanks Chris. Definitely something to think about.
Inna gadda da vida baby
I guess commission and charges eats more of the credit recieved in this strategy.
I appreciate all the videos, I've learned a lot from you guys but please, for the love of God pick a simpler options chain when you're trying to explain the concept. Go with like Intel. I'm good at math but running a four-leg option at $25 increments in my head watching a video is difficult.