The short iron fly strategy is an advanced option trading strategy that combines option buying and option selling. This strategy needs to be used in an underlying that is low-volatility and be in a specific range within the expiry contract.
This strategy comes with limited profits and losses.
let’s understand How the short iron fly strategy works:
1. In order to apply this strategy, you need to identify an asset that will be low volatile for a small period of time. You can select any index or stock that has option trading available
2. Selection of strike price is based on your range expectation of market, let me assume market Nifty CMP 18250 your expectation of market will be in a range of 300 point which is 18100 – 18400 then you will be selling an option 18100 PE and 18400 CE both are 3th OTM strike price and then you will be buying further far OTM strike price which might by 5th OTM or 7th OTM. Expiration date of the contract need to be same.
3. The execution of this strategy needs to is first you need to buy CE & PE option then Sell CE & PE option.
4. Managing risk and protentional profit: The maximum profit is the net selling amount from the option, which is limited profit, and the maximum loss is the width between the strike price of the long and short positions minus the credit received. Any trader can choose to exit as per the target or exit the trade if it is not going as expected.
The short-fly condor strategy aims to generate profit through the premium collected from selling the options. However, it's important to note that this strategy has limited profit potential and carries potential risks if the underlying asset moves significantly beyond the range of the short options.
Rule-Based Trading: In short, with the iron condor strategy, you can apply a rules-based trading system that will have a fixed entry time, exit time, and stop loss. The rule is pretty simple.
If you follow this rule consistently for 3 months, you will be able to see the result.
How this strategy will give you profit and loss:
Short iron fly strategy is an hedging strategy with limited profit and limited loss, identify a underlying which is less volatile and have a range and according to that you can implement the strategy.
All you need to have a strategy which really works in the market by which you can generate a consistent income from short iron condor strategy with an rule based strategy as well. Make sure you learn before implementing the strategy..