Broken Wing Butterfly Spread

: Summary

Broken Wing Butterfly Spread - Introduction


The Broken Wing Butterfly Spread, also known as a Skip Strike Butterfly Spread, is neutral options strategy and is a variant of the Butterfly Spread options trading strategy. The Broken Wing Butterfly Spread is simply a butterfly spread with risk inclined to one side. This means that rather than an equal risk when the stock breaks out to topside or downside, the Broken Wing Butterfly Spread transfers all the risk in one direction onto the other in order to create a options trading risk profile with maximum loss when the stock goes either upwards or downwards and totally safe when the stock goes in the protected direction.

The Broken Wing Butterfly Spread also differs from the Butterfly Spread in that it is usually put on as a zero cost spread or credit spread.

Learning the Butterfly Spread first makes the Broken Wing Butterfly Spread options trading strategy easier to understand.



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Broken Wing Butterfly Spread - Risk Adjusted Butterfly Spread


The main purpose of a Broken Wing Butterfly Spread options trading strategy is simply to adjust the risk profile of a regular butterfly spread. A regular butterfly spread makes a loss when the stock breaks out to either direction. A Broken Wing Butterfly Spread enables you to totally transfer the risk of one direction onto the other. This is useful when you wish to speculate on a stock being stagnant but that you are confident that if the stock should break out, it will do so only in a certain direction.

The Broken Wing Butterfly Spread options trading strategy does this by simply buying out of the money options with a further strike price from the middle strike than the in the money leg. A regular butterfly spread would have both out of the money options and in the money options at an equidistance strike price from the middle strike.

Because the Broken Wing Butterfly Spread transfers the risk from the in the money side to the out of the money side, the Call Broken Wing Butterfly spread would have to be used to protect against the stock breaking downwards and the Put Broken Wing Butterfly Spread would have to be used to protect against the stock breaking upwards.

Here's a table summarizing the differences between a regular butterfly spread and the Broken Wing Butterfly Spread:

Regular Butterfly Spread Broken Wing Butterfly Spread
Two long strikes at equidistance from middle strike Out of the money strike is further from the middle strike
Debit Spread Zero Cost or Credit Spread
Lower margin requirement Higher margin requirement
Lower Maximum Loss/Profit Higher Maximum Loss/Profit

Please click on the respective risk graph to learn about each variant of the Broken Wing Butterfly Spread.

Call Broken Wing Butterfly Spread Risk Graph      Put Broken Wing Butterfly Spread Risk Graph
Learn How To Read These Charts




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