wow!! i did not think anyone looked at those trades, but since the vols have picked up i felt it has been too risky to put on the weekly fly's, especially in the case if one leg moves big to one side and naturally trying to adjust just so i could get whipsawed.
It doesn't have unbounded risks, but certainly it's short gamma at virtually all points on the distro. When it's long gamma[mildly] you don't want to hold the short iron fly[long natural].
how do you feel about r/r on this trade....also vs FOTM instead of waiting the whole month to cash in a small credit, i could concievably close this trade w/in a few days if vol drops for a profit?
I like it. I love it compared to a teenie-credit vertical. As you state, there are opportunities for offset due to the vega exposure. It's more sensitive to gamma this close to expiration.
The IRON FLY has its own pros and cons and it is not easy quick money if vols drop a bit. We have a FED announcement in two weeks. If the news is bad, vols pick up as SPX drops and you will not have a profit. If the news is good and the market takes off, vols will drop but now your straddle detlas kick in and you might have a small gain or be flat given the wide b/a spreads. IRON FLYs are not the best position to put on SPX since you could have $1.00 on 4 strikes of bid/ask spreads which could offset most of your gains. My advice is paper trade a comparable SPY or XSP FLY with 10 contracts and see which reacts better. The idea might be good but not for this product or better yet, might be better for the SPY or XSPs where the bid/ask spreads might make it easier to get the fills you need or hedge with SPY stock or other options. IMHO.
I must not have made myself clear, I apologize. Currently credit spreads are my bread and butter, and I make a nice monthly income off of trading them, following the risk management guidelines you have set forth which has taken my trading to another level. But I feel, as a businessman, you need to re-evaluate your postion every so often to ensure you are still on top of your game, and persuing the correct goals. I fully agree that credit spreads can be non-directional, and that the spike in vol can lead to juicer prem and larger ranges, obviously since all we are doing is getting paid to take a probability bet. But, are there safer or more profitable ways to take advantage of a potentially changing market? For example, you are daytrading the ES, which I cannot do from a time perspective, so my question boils down to, are credit spreads still the optimal trading strategy for income investment without trading on a daily basis in a higher vol market? I'm sure there are a wide variety of options, but I'm just looking for your opinion. thanks, burrben.
I couldn't find in the thread exactly where you guys define what you are doing with the Iron flys. Could someone fill me in on where I am missing more details to this trade.
Well the short answer is that credit spreads are not the optimal strategy because it is really an individual preference based on trading style and risk management. I would not say any strategy in a vacuum is optimal per se. If your question is based on income investment, I have to ask what you mean by that. Do you mean generating monthly returns or actually bringing in income you take out month to month. Because if you have no need to withdraw the money, then income investing can be based on quarterly or annual positions and not on taking in a specific credit month to month. I do not do credit spreads for income specifically, I do them as an investment vehicle and it happens to be a position whose time frame is monthly. Futures is on a daily time-frame. There is no reason why you cannot do long option positions for income in whatever time frame you choose as long as the strategy matches your investment style and risk management preference. I am not trying to be difficult, it is just it is hard to define an optimal strategy for anything since it all depends on the individual. One trader I know does calendar spreads month to month to generate returns. It is a debit position but he tries to make monthly profits. So the job for you is to examine your own investment style and see what other strategies in addition to credit spreads fits. For me it was daytrading futures due to my capital, index experience and ability to watch the market daily among other factors. For you, you do not have the time for futures daytrading so you need to find your other niche. I also buy and hold closed end funds to generate monthly income by searching out income funds. So options month to month, futures day to day and CEFs as long-term holds. Self analysis will help you find which products meet your needs and allow you to diversify your investments better.
I don't think IFly's have really been discussed before in this thread...which is primarily abt OTM credit spreads. The recent increase in volatility has prompted some thought as to how we might try to profit from it and IFlys might be one way. I do think coach is right is looking more to the xps or spy to do them...my guess is very difficult to fill without a great deal of slippage (on the spx.)
thanks, coach..instead of paper trading the spx, i thought of exactly what you mentioned and perhaps try the trade with a small similar spy/xsp position and see how it works.