Synaptic,
Best thing to do is examine how the PnL behaves for the position using a suitable position analysis tool of which there are many to choose from.
When between the wing strikes, the fly is short vega and short gamma i.e. the fly wants the underlying to sit still in order to make money.
As time progresses and expiration gets closer, we know what happens to gamma - it becomes peakier i.e. kurtosis. The fly position can be thought of as a play on this kurtosis.
In line with the gamma curve exhibiting kurtosis - so does the PnL of the position when at the body strike i.e. as time goes by, PnL increases.
Looking at gamma for the fly position you will notice that it goes from positive to negative to positive depending where it is in relation to the body and the wing strikes. You may wish to take advantage of this fact by gamma scalping when/where appropriate if you have an appropriate instrument to do so.
The fly you looked at is an iron fly that you put on for a credit. This is no different to a put or call debit fly with the same strikes 580/585/595.
The higher the volatility and further out in time you are, the cheaper the fly. This is obvious when you think of volatility as synthetic time i.e. time passing has the same effect on a position as volatility decreasing and vice versa. An increase in volatility can turn back time so to speak - this can be witnessed on the likes of the gamma curve. When volatility increases it can undo some kurtosis but I digress...
So to answer your question, if IV collapses before expiration you might be able to take some significant profits before expiration. However, in general, profit taking on a fly is only worthwhile in the last 5 days or so - at least as far as OEX flies are concerned.
You still need the underlying to be relatively close to the body strikes for this to work though.
The fly you outlined is lopsided, not sure if that was intended but it is helpful to understand what other positions are "embedded" in that lopsided fly so that you can take advantage if possible.
Recommend Cottle's Option Trading: The hidden reality for position dissection and discussion on flies. I should start getting commissions the amount of times I've linked to his book
[EDIT: earlier discussion on flies in the last week]
Enjoy.
Best thing to do is examine how the PnL behaves for the position using a suitable position analysis tool of which there are many to choose from.
When between the wing strikes, the fly is short vega and short gamma i.e. the fly wants the underlying to sit still in order to make money.
As time progresses and expiration gets closer, we know what happens to gamma - it becomes peakier i.e. kurtosis. The fly position can be thought of as a play on this kurtosis.
In line with the gamma curve exhibiting kurtosis - so does the PnL of the position when at the body strike i.e. as time goes by, PnL increases.
Looking at gamma for the fly position you will notice that it goes from positive to negative to positive depending where it is in relation to the body and the wing strikes. You may wish to take advantage of this fact by gamma scalping when/where appropriate if you have an appropriate instrument to do so.
The fly you looked at is an iron fly that you put on for a credit. This is no different to a put or call debit fly with the same strikes 580/585/595.
The higher the volatility and further out in time you are, the cheaper the fly. This is obvious when you think of volatility as synthetic time i.e. time passing has the same effect on a position as volatility decreasing and vice versa. An increase in volatility can turn back time so to speak - this can be witnessed on the likes of the gamma curve. When volatility increases it can undo some kurtosis but I digress...
So to answer your question, if IV collapses before expiration you might be able to take some significant profits before expiration. However, in general, profit taking on a fly is only worthwhile in the last 5 days or so - at least as far as OEX flies are concerned.
You still need the underlying to be relatively close to the body strikes for this to work though.
The fly you outlined is lopsided, not sure if that was intended but it is helpful to understand what other positions are "embedded" in that lopsided fly so that you can take advantage if possible.
Recommend Cottle's Option Trading: The hidden reality for position dissection and discussion on flies. I should start getting commissions the amount of times I've linked to his book
[EDIT: earlier discussion on flies in the last week]
Enjoy.
