Although a short iron condor with the inner wings being OTM by the price of the straddle, and the outer wings being one strike further out, is probably what I really want.
Actually, I would imagine it would be less. Selling an ATM straddle naked will be expected to win 2/3rds of the time (assuming normality (of returns) as LTW says). Buying a strangle will lower the win ratio unless you could put it on for zero cost! This is intuitive as the strangle brings in your break even point
I agree with xandman in that there are no magical formulas. Without wanting to reopen what appears to be an old age debate, the expectancy (fair value) is equivalent to doing the opposite. The credit/debit you receive will compensate you for the odds. It is important to be happy with the risk/reward ratio but that may be a personality thing.
The other big issue to remember here is that if you are trading butterflies/condors in skewed markets, you must account for the skew in both pricing and hedging. Butterflies/condors present as double risk-reversals and are therefore quite sensitive to skew.
Hi LTW Can I ask, is there a best practice method/calculation to assess the skew (expressed as a single IV figure) in a fly/3 legged position? I suspect one method may be to calculate the put and call strike price using the ATM IV and simply compare it against the cost of the fly in the market. TIA
I don't know about "best" practice. Here's the CBOE white paper link for the SKEW index. It probably has some helpful stuff in it. https://www.cboe.com/micro/skew/documents/skewwhitepaperjan2011.pdf