Hi Gary,
If you take the concept of long flies which work best in a high IV environment, the opposite is a good rule of thumb with short flies.
Long flies are cheaper to buy when IV is high and improve with falling IV. Therefore more premium can be taken in on short flies if IV is lower - as Cutz has pointed out and could explain why there isn't much premium at this stage as IVs are still too high for a worthwhile, short fly. It also depends on where you position a fly - whether it is ATM or OTM - this is something worthwhile to play around with as it helps gain a greater understanding of how the greeks affect multi-legged positions placed at different strikes, widths, etc.
It's not only IV that makes for a cheaper butterfly (or little premium for the short fly) - but also theta. So the further out in time, the cheaper it is to buy flies and not worthwhile premium for short flies. As expiry approaches, OTM flies lose their value quickly where ATM’s gain a little more quickly. If there is a vertical IV skew as opposed to a more symmetrical smile (eg otm puts with higher IV than otm calls (NB: different strikes)), it may be more advantageous to place sold flies above the market.
So, if you are taking the opposite side of the long fly holder, you want the opposite conditions. Obviously, it is ideal if the underlying has moved well away from the short fly as expiry approaches. One possible place to consider a short fly as an initial strategy would be on potential high point in the underlying where IV has fallen significantly and a strong move is expected (but not sure which way). A strong move would take the underlying well away from the centre of the strikes. If that happens, it is likely possible to place another spread in the direction of the move.
EG XYZ - market trading at $25. Sell 24.50 / 25 / 25.5 fly for 10c. Market drops to 24. If you think it's made a low point, one can then either add 24 / 24.5 put credit (or call debit (same strikes) if assignment is a concern of doing the same thing with puts). You can even add another short fly if you think there may be more down do come and if there is enough premium in the short fly due to IV increase.
You will see why I won't do these any more in the Oz market as they are too expensive in fees and slippage. They're not a holy grail as there is a risk of the market not moving when you put the first one on and then the fly holders gets all the profits at your expense.
I think there are better ways to trade than short flies as a stand alone strategy - but they can be useful as a starting point and then followed up with adjustments. Strategies like the condor are great if the market is range bound, but they are not easy to adjust if the market moves into the danger area. The short flies are great if the market moves away from the ATM area (where the best premium is to be found for the short fly) and then one can follow up with adjustments as I have described above, thus adding more favourable positions as the market moves. Of course, as mentioned above, the risk lies in the underlying not moving away from your short fly.
Well, I thought I could type up a quick answer – sorry for the long post. Very difficult to condense this stuff! And I am only passing on to the level of my own ability and understanding – there are others out there that are way ahead of me, so I am still learning too! I think it’s all about trying some of these techniques out (on paper!) in an effort to find your niche in options trading. What works for one may not work for another.
Hopefully some food for thought - and hope it makes sense. Have had heaps of interruptions while typing it.
PS - Cutz, I see you have also posted on the effect of time while I was typing up this long speel! Agree that short flies are an interesting subject!