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Long Iron Fly Strategy

Strategy Type:

Long Iron Fly is a neutral strategy. It's used when an investor anticipates limited price movement in the underlying asset and aims to profit from time decay and declining option premiums.

Components: The strategy involves buying four components:

  • Short Call Option: Simultaneously, the investor sells (writes) a call option with a higher strike price. This provides upside protection and defines the maximum loss on the call side.
  • Long Call Option: The investor buys a call option with a specific strike price.
  • Long Put Option: The investor buys a put option with a specific strike price.
  • Short Put Option: Simultaneously, the investor sells (writes) a put option with a lower strike price. This provides downside protection and defines the maximum loss on the put side.

Profit and Loss Potential:

  • Maximum Profit:The maximum profit is limited and occurs if the underlying asset's price remains at the strike price of the short call option. The profit is limited to the net premium paid when buying the options.
  • Maximum Loss: The maximum loss is limited and occurs if the underlying asset's price moves significantly beyond the strike prices of the short call and short put options.
Break-Even Point: The break-even points are the strike prices of the long call and long put options plus the net premium paid when buying the options.

Strategy Goals:

  • The primary goal of a Long Iron Fly is to profit from limited price movement in the underlying asset while controlling risk.
  • The strategy provides a defined profit range centered around the strike prices of the long call and long put options.

Risk Management:

  • The risk is limited to the net premium paid when buying the options. This defines the maximum loss.
  • The strategy offers controlled risk with limited profit potential.