High Volatility Iron Butterflies

Discussion in 'Options' started by BobJones, Apr 17, 2008.

  1. BobJones


    I have been experimenting with putting on Iron Butterflies in high volatility stocks. The risk/reward characteristics of these spreads seem pretty hard to beat. I was wondering if this is a strategy others have tried.

    Ex: In RMBS you could sell the 25-23-21 Iron butterfly for 1.80 by (using mid market prices) with the stock at 24.20

    Basically the spread had 1.80 per contract possible gain with only a .20 per contract possible loss.

    Obviously in this case not only would you need a move down as you would be short deltas (23.00 being your max gain price) but the reason the options carry such a high volatile is because of their likelihood for large moves. In the case of RMBS it is currently trading 22.45 and the spread with expire tomorrow a winner (assuming no news on their lawsuit)

    Does anyone else use this strategy? It would seem to work the best for stocks trading at a high volatility because of takeover rumors or lawsuits as these can be dragged on for some time.
  2. Backtest these (for example in optionvue or optiongear or whatever) to see how they pan out and you'll have your answer.