Iron Fly Strategy in Live Trading: Fixed Risk Option Trading

Iron Fly strategy live trading

Iron Fly strategy is one of the most traded strategy in option trading. Most of the option sellers prefer to implement Iron Fly in sideways market or when market is range bound. We will try to know why and when to apply this strategy in live trading environment.

We are not going to back test this fixed risk option trading strategy; instead, we will test it in live trading to find our whether it really works.

Although, this strategy is positional, I have tested it in Intraday AKA Day trading and it astonishingly it worked like a charm.

Before we jump in lets understand from scratch what exactly is Iron Fly strategy.

What is Iron Fly strategy?

To make an Iron Fly, first thing we have to do is understand the market behavior and when we are sure, market is going to be range bound for the next few hours, days, or months and at the same time VIX is also high (but strictly not more than 25) then we can think of applying an Iron Fly strategy.

In Iron Fly, we sell both At The Money (ATM) put and call of select expiry and buy Out of The Money (OTM) put and call strikes. Let’s understand it with following example:

Let’s assume Banknifty is right now at 35600 and our analysis say that it will remain in 1000 points (500 points in each direction i.e. range 35100-36100) range till the next expiry. So in this case, we can make an Iron Fly strategy.

By watching the above video, you can learn how to make an Iron Fly. Video language is Hindi. If you don’t understand the language then don’t fret. I have explained IF option trading strategy in very simple words.

How to make Iron Fly Option Strategy?

First of all, we will select current expiry date (you can also select next expiry if you wish to create IF (Iron Fly) for the next expiry) and we will sell 35600 strike price’s CALL and PUT. This becomes a Short Straddle. Now to convert it to Iron Fly strategy pay attention to following screenshot and find out our breakeven points:

Important points of this Straddle:

  • Maximum profit we can earn is ₹34979.
  • Maximum loss is unlimited which means this straddle theoretically (theoretically because you are not going to see when your loss will be increasing, you would certainly have decided a Stop Loss. Don’t you?) can give us unlimited loss.
  • Our range is 2800 points (1400 down and 1400 up).
  • Probability of profit is 56%.

I have highlighted the breakeven points which are 34200 and 37000. Now we have to buy 34200 PE and 37000 CE to complete our Iron Fly Strategy.

Now see new screenshot when we have successfully made our Iron Fly strategy:

Important points of our Iron Fly:

  • Maximum profit we can earn is ₹23328.
  • Maximum loss is ₹11673.
  • Our range is 1900 points (950 down and 950 up).
  • Probability of profit is 40%.

Did you notice something very important which is why traders prefer Iron Fly strategy in option trading?

Yes, you found it. Maximum loss is ₹11673. As mentioned in the beginning, IF is a fixed loss option trading strategy therefore no matter where the market goes, you maximum loss is not going to cross ₹11673 benchmark.

But very important to mention, maximum profit is not fixed in this option trading strategy. It may decrease or increase. And also, by passing the time, your probability of profit will increase if everything goes as planned.

This is how you make an Iron Fly option strategy. Its probability of profit is quite lucrative therefore most of the traders implement IF strategy to make profit in stock market.

Important: Execute all the orders at once to make a perfect IF. For that purpose, you can create a Basket Order like Zerodha Trading Platform offers you.

Recommended trading platforms in India:

  • Zerodha: No. 1 discount stock broker in India (Recommended)
  • Angel Broking: Especially recommended for trading from mobile.

Benefits of Iron Fly Strategy

  • Maximum loss is fixed in Iron Fly option trading strategy.
  • POP (Probability of profit is reasonably good).
  • Works perfectly in range bound market when VIX is below 25.
  • You get a good market range to make profit. If market is going to expire in range then you will make profit. Note: Maximum profit will be at the peak of pyramid.

Drawbacks

  • If you want to make profit in Iron Fly then market must close in your range. Otherwise, you will be in loss.
  • One sudden spike in the market will wipe out your profits.
  • Iron Fly strategy works perfectly in range bound market. You cannot implement it in all market conditions.