NaughtyPines

EWZ -- APRIL 15TH 18.5/22/22/25.5 IRON FLY

AMEX:EWZ   ISHARES MSCI BRAZIL CAPPED ETF
9 months ago
With volatility ebbing out of the broader markets and earnings season, for all practical purposes, over, I'm looking to put on some small, defined risk, premium selling plays in April while the remainder of my March setups work themselves out. With an implied volatility rank at 60 and an implied volatility of 48, EWZ             isn't the greatest play in the world for premium selling, but it is an ETF . They're less volatile than individual underlyings as a general matter, so I lower my premium selling standards accordingly.

There are a couple of different ways that you can look at an iron fly: (1) it's a defined risk short straddle; or (2) it's a really tight iron condor. I tend to treat them as "defined risk short straddles," because I manage short straddles differently from short strangles (an iron condor is basically a defined risk short strangle). With short strangles and iron condors, I look to take the whole trade off as a unit at 50% max profit.

Short strangles and iron flies are a different story. If you look at the metrics for this particular trade, the break evens are quite tight: 19.92 and 24.08 -- much tighter than they would be for a short strangle or iron condor setup, and there is virtual certainty that one side or the other will be tested sometime during the trade since the short options are basically at or near current price. As with all premium selling plays, though, you're looking for volatility to contract rolling into expiry, and you can profit from this circumstance even when -- with iron flies or short straddles -- price has broken one of the short strikes of your setup (but not the long side).

As always, there are trade offs with the setup: max profit is a 2.08 credit ($208/contract; BPE $142/contract). I couldn't get near that much credit if I went with a standard iron condor (an April 15 15.5/18.5/25.5/28.5 iron condor will rake in a whopping .41 in credit at the expense of a BPE of $259/contract). Because of this trade off and the fact that the probability of profit for an iron fly is basically a coin flip as compared to the iron condor's 70-75% probability of profit, I'll look to take this setup off at 25% max profit instead of the usual 50%.

Naturally, this isn't my preferred way of doing things. However, with underlyings below $50/share, you generally cannot take in enough premium if you're going with a defined risk arrangement to make it worthwhile unless you tighten your iron condor or go the "defined risk short straddle" or iron fly.
9 months ago
Comment: Filled for a 2.08 credit. Set up a GTC order to take the setup off as a unit at 25% max.
Benji PRO
9 months ago
How is this even worth it after commissions? Even if you have the $1.5/contract?
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NaughtyPines Benji
9 months ago
2.08 credit is per share; each contract represents 100 shares, so the max profit on this setup is $208/contract. 25% of the max is $52 per contract. Depending on your risk tolerance, size of your account, etc., you naturally may want to go larger than 1 contract, since that will only get you $52 if you take it off at 25% max. I don't share the number of contracts I use, but it's generally larger than 1 for these small plays ... .
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Benji PRO NaughtyPines
9 months ago
Oh my bad. I was scanning through it and saw the .41 credit and that that's what you did the Iron fly for. Yes, now this trade makes much more sense.
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NaughtyPines Benji
9 months ago
No problem. Some of this stuff is kind of foreign to the vast majority of traders ... . Yeah, that .41 credit ($41/contract) for the iron condor ain't so hot. I generally want at least a 1.00/contract ($100) from the get-go for any setup, particularly if I'm going to be taking it off for 50% max profit ($50). You can certainly do stuff for less than that and manage the take profit differently, but I just like to take my money and run most of the time.
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Benji PRO NaughtyPines
9 months ago
You seem to trade the TT way, yes. I am having a hard time finding others that trade like this on here.
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NaughtyPines Benji
9 months ago
There are, at most, a handful of traders who sell premium, which is what I try to do the vast majority of the time. I'm a big fan of TastyTrade and their statistical approach to what works and what doesn't ... .
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