According to the guy who taught me, iron is the key due to different behavior of OTM calls and puts. Plus liquidity is better (.03-.04 spreads are common). Commissions are a big factor, of course. He uses OptionHouse where 250 IBs would cost $162.5. (15c/contract + $12.5). That means a break-even point is less than 2c away from an entry price. I tried this trade with TradeMONSTER (50c/contract).
I will defenitely paper traded in several forms; put, call and iron flies. I assume the 5 point wide wings is also crucial? Anyway, I was having a look at SPY options (are they european style?) where an atm long put fly 1-point wide is about the same price both on sep and oct options. SEP12 (+p143-2p144+1p145 = 0,16 debit market price)
"Vol is really a fixed/floating swap where you buy or sell the fixed rate (implied vol) and receive/pay the floating rate (realized vol). " never thought about it that way, thanks for that.
5 point wing is also important. SPY options are is American style. 1 point fly is highly speculative, IMHO. In order for it to work UL has to be in some range or at least come back to the original price within the life time of the spread.
Not really. The trade is opened when there are 30+ days are left till option expiration and closed within 10 following days. By that time there will be plenty of time value left in ITM option even if they go deep ITM.
So, that is how dec12 options look like after the market rally. (+p143-2p144+1p145 = now is worth 0,15)