I was thinking that you would still put the body strike at 159, only structure it as a 1-3-2 fly. When you are buying 2x the further OTM strike (the 155 strike), doesn't that mean you're unnecessarily paying more expensive premium (as the further OTM you get, the more expensive the IV)? In other words, instead of the buying the 155/159/167 (2-3-1) for $1.41 why not buy the 151/159/163 (1-3-2) for $0.66? Wouldn't the 1-3-2 benefit a lot more from a realized vol drop?
IWM is trading at $166.39. The only substantial exposure in the fly that you're quoting is delta. Also, you'd still do the put as it's entirely OTM (microstructure). I think that you may be off on quoting IWM.
I think I'm following you now. You'd want the higher strike to be ATM, which is why we use a 2-3-1 configuration for put flies. Is that correct? The way I was thinking about it is that because we have high skew on the downside we'd want to avoid buying more of the down & out puts because they are theoretically overpriced (we're buying 2x of those in a 2-3-1 put fly). But like you said, looking at the profit curve that would mean more of a bet on downward movement instead of the skew. Thanks Des.
The 231P = 132C. Yeah, you're buying the highest vol-figure in the two-lot, but it's small in price-terms. You can sum the vol or price the three strikes to a flat skew and you'll see that the actual fly is cheaper than the stressed-fly (flat skew).
That's an interesting approach. I used to compare flys across different assets (the longer dated ones I described) by pricing them at a "fair skew level".
Sure, what-ifs are easier your way. I sum the vol as well as price flat as I like to see the premium. It's less abstract.