Pick a holding period and price the OTM fly against the current neutral fly to n-date. It will give an expectancy at static-vol. IOW, if the OTM fly = 5.5, neutral fly is 11 (day 1), and neutral fly is 13 at n-date forward. You solve for hedge assuming you have 7.5 to work with if OTM fly trades to body strike at n-date.
Gotchya; much appreciated. I'll have a go at modelling that over the next week or so as it makes sense as an approach. FWiW, my (very early stage) hypothesis - caveat untested - is: I have a slight positive EV taking credit for 28DtE IronFlies when IV is relatively high but drawdowns are brutal so it needs hedging. As a retail guy with a relatively small account, I can't effectively delta-hedge, and various attempts using vertical spreads haven't really achieved what I need Buying 28DtE OtM Call flies held to expiry gives a positive EV when backtested over 1000 sessions / 4 years - so mainly through a bull market. OtM Put Flies under same conditions do not. Obviously if both can be used together to increase and/or smooth returns, that would be useful I can run MonteCarlo sims on each individual Fly each day to assess whether EV exceeds target return, but this requires time that I cannot devote owing to other commitments. I like the idea of incorporating simulations to price the fly against neutral for a range of n-dates and IVs and will explore this in due course to see if I can add value to the process.
The ATM bull fly (SPX 4700; 4700-4900) is the revenue side of the risk-reversal. IOW, the ATM cfly/pfly >1 in price. A result of skew under the mkt. The reason your backtest prefers the calls is bc we're in a bull as you suggest and vol-corr. I would imagine that your average hold suggested by the backtest is something like 18-20 days.
You didn't know that I had opened a couple of small positions to test this. Closing orders filled for the first few this week. 19 days 20 days 20 days Top prediction @destriero !! BtW, been busy with other stuff so I haven't got round to the modelling that we discussed, but I will.
As an update, markets have obviously been very kind to anyone doing OtM call flies recently. 10 round-trip trades here. 1 loss & 9 profit closed in profit. Average P&L 172%. Average duration 19 days.
The really sad thing is that if I used half my brain, I'd understand what Dest is saying here. And if using full brain, we'd be uber. I hate my lazy self, and lack of understanding of options. Those people are crazy. *weak laugh*
I just played with LongButterfly (and LongCondor) and saw that such high results for a single trade are very well possible when it's traded in a MarginAcct, but not so much in a CashAcct. Indeed very interesting & impressive results. I'm adding them to my arsenal.
Thank you. Neither. I have accidentally misled because my initial hijacking of this was to hypothesize about using lottery-type flies to hedge short vol positions. Conditions (low-vol) haven't been right for me to open short vol positions, but I opened a few long flies speculatively. The current book for expiry in March isn't looking so rosy right now!