Broken-Wing Butterfly
Butterfly with unequal wings for directional bias
What is Broken-Wing Butterfly?
Broken-Wing Butterfly A broken-wing butterfly is a modified butterfly spread where the wing widths are unequal, creating a directional bias while maintaining a defined-risk structure. Unlike a standard butterfly that is centered and delta-neutral, a broken-wing butterfly skews the position to one side by widening one wing and narrowing the other. This asymmetry often allows the trade to be entered for a small credit, eliminating risk entirely on one side of the spread. How it works: A standard butterfly uses three equidistant strikes, such as $145/$150/$155. In a broken-wing put butterfly, you might buy the $145 put, sell two $150 puts, and buy one $160 put. The wider upside wing ($150 to $160 = $10 wide) compared to the downside wing ($145 to $150 = $5 wide) generates a net credit because the wider wing has more premium captured. If the stock stays above $160, all options expire worthless and you keep the credit. The maximum profit occurs at the short strike ($150), while risk exists only below $145. For example, with TSLA at $175, you enter a broken-wing put butterfly: buy 1 $155 put for $2.80, sell 2 $165 puts for $5.50 each, and buy 1 $180 put for $14.20. Net credit: ($5.50 x 2) - $2.80 - $14.20 = -$6.00, so you pay $6.00 net. If TSLA closes at $165, maximum profit is $10 (the narrow wing width) minus $6.00 = $4.00, or $400 per spread. Above $180, you lose nothing (all puts expire worthless, losing your $6.00 debit). Below $155, your maximum loss is limited to the full wing width minus any premium offsets. Traders use broken-wing butterflies to express a directional view with limited risk. They are popular for earnings plays where a trader expects a moderate move in one direction and wants defined risk with no exposure on the opposite side. The structure is also used as a hedge overlay, replacing outright protective puts with a more capital-efficient defined-risk structure.
Complete Definition
A broken-wing butterfly is a modified butterfly spread where the wing widths are unequal, creating a directional bias while maintaining a defined-risk structure. Unlike a standard butterfly that is centered and delta-neutral, a broken-wing butterfly skews the position to one side by widening one wing and narrowing the other. This asymmetry often allows the trade to be entered for a small credit, eliminating risk entirely on one side of the spread. How it works: A standard butterfly uses three equidistant strikes, such as $145/$150/$155. In a broken-wing put butterfly, you might buy the $145 put, sell two $150 puts, and buy one $160 put. The wider upside wing ($150 to $160 = $10 wide) compared to the downside wing ($145 to $150 = $5 wide) generates a net credit because the wider wing has more premium captured. If the stock stays above $160, all options expire worthless and you keep the credit. The maximum profit occurs at the short strike ($150), while risk exists only below $145. For example, with TSLA at $175, you enter a broken-wing put butterfly: buy 1 $155 put for $2.80, sell 2 $165 puts for $5.50 each, and buy 1 $180 put for $14.20. Net credit: ($5.50 x 2) - $2.80 - $14.20 = -$6.00, so you pay $6.00 net. If TSLA closes at $165, maximum profit is $10 (the narrow wing width) minus $6.00 = $4.00, or $400 per spread. Above $180, you lose nothing (all puts expire worthless, losing your $6.00 debit). Below $155, your maximum loss is limited to the full wing width minus any premium offsets. Traders use broken-wing butterflies to express a directional view with limited risk. They are popular for earnings plays where a trader expects a moderate move in one direction and wants defined risk with no exposure on the opposite side. The structure is also used as a hedge overlay, replacing outright protective puts with a more capital-efficient defined-risk structure.
Example
Buy 1 $145 put, sell 2 $150 puts, buy 1 $160 put. The wider upside wing creates a credit entry with no risk above $160 but larger risk below $145.
Related Terms
Frequently Asked Questions
What is a broken-wing butterfly spread?
A broken-wing butterfly is a butterfly spread with unequal wing widths, creating a directional bias. One wing is wider than the other, which can allow the trade to be entered for a credit and eliminates risk on one side of the position. It combines the defined-risk nature of a butterfly with a directional outlook.
How is a broken-wing butterfly different from a regular butterfly?
A regular butterfly has equal-width wings and is delta-neutral, profiting from the stock staying near the center strike. A broken-wing butterfly has one wider wing and one narrower wing, giving it a directional bias. This asymmetry usually means you take on more risk on one side but eliminate it on the other.
When should you trade a broken-wing butterfly?
Broken-wing butterflies work well when you have a directional bias and want defined risk. They are popular for earnings trades where you expect a moderate move, for collecting premium with no risk on one side, and as capital-efficient alternatives to outright directional trades like vertical spreads.
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