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Short Iron Fly Strategy

Strategy Type:

Short 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 three main components:

  • Short Call Option: The investor sells (writes) a call option with a specific strike price.
  • Long Call Option: Simultaneously, the investor buys a call option with a higher strike price.
  • Short Put Option: The investor sells (writes) a put option with a lower strike price.

Profit and Loss Potential:

  • Maximum Profit:The maximum profit is limited to the net premium received when selling the options. It occurs if the underlying asset's price remains at the strike price of the short call option.
  • 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 point is the strike price of the short call option plus the net premium received when selling the options.

Strategy Goals:

  • The primary goal of a Short Iron Fly is to profit from limited price movement in the underlying asset while generating premium income from selling the options.
  • The strategy offers a limited profit range centered around the strike price of the short call option.

Risk Management:

  • The risk is limited to the difference between the strike prices of the long call and short call options. This defines the maximum loss.
  • The strategy offers controlled risk with a limited profit potential.