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Broken Wing Butterfly: Short & Long Options

Overview

DEFINITION

A Broken Wing Butterfly is a long butterfly spread with long strikes that are not equidistant from the short strike. This leads to one side having greater risk than the other, which makes the trade slightly more directional than a standard long butterfly spread.

DIRECTIONAL ASSUMPTION

Neutral / Slightly Directional

IDEAL IMPLIED VOLATILITY ENVIRONMENT

High

PROFIT / LOSS CHART
Call Broken Wing Butterfly

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Put Broken Wing Butterfly

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SETUP

Broken wing butterfly spreads can be constructed with either all calls or all puts. The trade is comprised of two short options and a long option above and below the short strike:

Buy Call or Put (above short strike)

Sell 2 Calls or Puts

Buy Call or Put (below short strike)

    EXAMPLE

    Buy 1 120 Call in XYZ
    Sell 2 105 Calls in XYZ
    Buy 1 100 Call in XYZ
    Net Credit = $1.00

    In this example, the 120 call is 15 points away from the short strike, while the 100 call is 5 points away from the short strike. Widening out the strikes on the upside leads to the trade being placed for a credit, which means there is no risk to the downside in this particular example.

    One of the long options will be further away from the short strike than the opposing side. The wider side is called the “broken” side and is what gives the strategy its name.

    HOW TO CALCULATE MAX PROFIT / BREAKEVEN(S)

    MAX PROFIT

    Width of Narrower Spread + Credit Received

    OR

    Width of Narrower Spread - Debit Paid

    BREAKEVEN(S) - CALL BROKEN WING BUTTERFLY

    Net Credit

    (Short Strike + Width of Narrower Spread) + Credit Received


    Net Debit

    Upside: (Short Strike + Width of Narrower Spread) - Debit Paid

    Downside: Lower Long Call Strike + Debit Paid

    BREAKEVEN(S) - PUT BROKEN WING BUTTERFLY

    Net Credit

    (Short Strike - Width of Narrower Spread) - Credit Received


    Net Debit

    Upside: Higher Long Put Strike - Debit Paid

    Downside: (Short Strike - Width of Narrower Spread) + Debit Paid

    tastytrade Approach

    Our approach to broken wing butterfly spreads is simple - we always route this for a credit. When we route this trade for a credit, we eliminate the risk of losing money if the entire spread expires out of the money. Routing this trade for a credit also drastically improves our probability of profit, for this very reason.

    CLOSE / MANAGE

    WHEN TO CLOSE

    When routing this strategy, it is usually for a very small credit. Therefore, we won’t look to close the trade if we see a small profit from that. We usually aim for 50% of our max profit on the trade. That would be when our closest long option to the stock price goes ITM near expiration. To get a rough calculation of this, just take the distance between the closest long option and the short options and divide by two.

    WHEN TO MANAGE

    If our spread goes against us, we will look to close our long spread aspect of the trade for max profit, and potentially roll the remaining short spread out in time if we can do so for a credit.

    Supplemental Content

    Episodes on Broken Wing Butterfly

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