Broken Wing Butterfly Strategy
Learn broken wing butterflies to achieve higher returns than standard butterflies by accepting limited risk on one side for enhanced profit potential.
What is Broken Wing Butterfly Strategy?
Broken Wing Butterfly Strategy is an asymmetric butterfly spread where the wings are different widths, creating a position with risk on one side only in exchange for higher profit potential.
BWBs can often be entered for credit, making them attractive compared to standard butterflies which require debit. The risk is one-directional, usually on the side opposite your bias.
TL;DR - Quick Summary
Broken Wing Butterfly = Standard butterfly but with unequal wings. Example: Sell 1 call at 100/105, Buy 1 at 105, Sell 1 at 112 (instead of 110). Creates credit with risk only if stock drops below 100. Higher profit potential than standard butterfly.
What is a Broken Wing Butterfly?
A broken wing butterfly (BWB) is a modified butterfly spread where one wing is "broken"—meaning the strikes are not equidistant from the body. This asymmetric structure allows you to collect a credit or reduce the cost to enter the trade.
Unlike a standard butterfly that costs money to enter and is perfectly balanced, a BWB can be established for a credit or small debit, making it more capital efficient while still maintaining a high-probability profit zone.
The trade-off? One side has unlimited risk (though typically far out of the money), while the other side has limited, defined risk. This makes it a directional, high-probability strategy rather than a neutral one.
Key Characteristics
- ✓ Asymmetric structure—one wing further OTM than the other
- ✓ Credit or low-debit entry—more capital efficient than standard butterfly
- ✓ High probability of profit—wide profit zone
- ✓ One side has undefined risk (but typically far OTM)
- ✓ Directional bias—slight bullish or bearish tilt
When to Use a Broken Wing Butterfly
1. Neutral to Slightly Directional
You expect the stock to stay relatively flat or move slightly in one direction. BWBs are perfect when you want to profit from range-bound movement with a directional tilt.
Example: Stock at $100, expecting it to stay between $95-$105 but slightly favoring upside.
2. High Implied Volatility
IV is elevated, allowing you to collect enough credit to establish the BWB. High IV means fatter premiums and better credit collection opportunities.
Example: IV rank above 50, with earnings or catalyst passed and IV expected to contract.
3. After Volatility Events
Post-earnings or after a major announcement when IV crushes and the stock is expected to stabilize. BWBs profit as time passes and volatility contracts.
Example: Earnings just passed, IV dropped from 80 to 40, expecting quiet period ahead.
4. Want High Probability Wins
You're focused on consistent, high-probability trades rather than home runs. BWBs typically have 65-85% probability of profit with proper strike selection.
Example: Selling far OTM strikes with only 15% chance of reaching at expiration.
5. Limited Capital Available
You want butterfly-like profit characteristics but don't want to pay the debit. BWBs can be done for a credit, requiring only margin/buying power rather than upfront capital.
Example: Receive $50 credit with $950 max risk on the undefined side.
How to Set Up a Broken Wing Butterfly
Call BWB Example (Bearish)
Let's set up a call BWB on a stock trading at $100, expecting it to stay below $105:
| Position | Strike | Type | Premium |
|---|---|---|---|
| Buy 1 | $105 | Call | -$3.00 |
| Sell 2 | $110 | Call | +$1.50 each = +$3.00 |
| Buy 1 | $120 | Call | -$0.50 |
| Net Credit/Debit | +$0.50 credit | ||
Notice the asymmetry: The lower wing is $5 wide ($105 to $110), but the upper wing is $10 wide ($110 to $120). This "broken wing" allows us to collect a credit.
Position Greeks
- • Delta: Slightly negative (bearish bias due to call structure)
- • Theta: Positive (benefits from time decay)
- • Vega: Negative (profits from IV contraction)
- • Gamma: Negative near the short strikes, becomes positive near long strikes
Strike Selection Guidelines
- ✓ Short strikes (body): Slightly OTM where you expect stock to stay
- ✓ Broken wing: Far OTM with low probability of being tested
- ✓ Near wing: Closer to short strikes for defined risk
- ✓ Expiration: 30-45 DTE for optimal time decay
Put BWB (Bullish)
For a bullish BWB, use puts instead. Buy 1 higher put, sell 2 middle puts, buy 1 far OTM lower put (broken wing). This profits if the stock stays above the short strikes.
Profit & Loss Scenarios
Scenario 1: Stock Below Long Strike (Max Profit)
Stock at $100 at expiration
- • All calls expire worthless
- • Keep the entire credit received
- • Net profit: +$0.50 per share = $50
Result: Keep the full credit collected—maximum profit for this BWB.
Scenario 2: Stock at Short Strikes (Excellent Profit)
Stock at $110 at expiration
- • $105 long call: +$5.00
- • $110 short calls (2x): $0
- • $120 long call: $0
- • Plus original credit: +$0.50
- • Net profit: +$5.50 per share = $550
Result: Near maximum profit—sweet spot for BWBs.
Scenario 3: Stock at Near Wing (Small Loss)
Stock at $105 at expiration
- • $105 long call: $0
- • $110 short calls (2x): $0
- • $120 long call: $0
- • Lose the original credit: -$0.50
- • Net loss: -$0.50 per share = -$50
Result: Small, defined loss if stock stays at lower boundary.
Scenario 4: Stock Beyond Broken Wing (Undefined Loss)
Stock at $125 at expiration
- • $105 long call: +$20.00
- • $110 short calls (2x): -$15.00 each = -$30.00
- • $120 long call: +$5.00
- • Plus original credit: +$0.50
- • Net loss: -$4.50 per share = -$450
Result: Loss increases $100 for every $1 move above $120 (undefined risk).
Risk Profile Summary
- • Max profit: Width of near wing + credit (or - debit)
- • Max profit occurs: At the short strike at expiration
- • Defined risk side: Limited to width of near wing
- • Undefined risk side: Unlimited beyond far long strike
- • Breakeven points: Two breakevens (one on each side of short strikes)
Managing a Broken Wing Butterfly
1. Take Profits Early (50-75%)
Don't wait for expiration. If you've captured 50-75% of max profit with significant time remaining, close the trade. This reduces risk and locks in gains.
2. Close Tested Side if Breached
If the stock moves against your broken wing (undefined risk side), don't let losses run. Close the entire position or convert it to a vertical spread by closing one long option.
3. Roll Out in Time
If approaching expiration without profit but still within your thesis, roll the entire structure to the next expiration cycle. This extends time for mean reversion.
4. Adjust Strikes (Roll Up/Down)
If the stock drifts toward your defined risk side, roll the entire butterfly up or down to re-center it around the current price. This may require adding a debit but resets your probability.
5. Monitor Gamma Risk
Near expiration, gamma risk explodes. Small moves can create large P&L swings. Close positions 3-5 days before expiration to avoid this risk, especially if near short strikes.
⚠️ Undefined Risk Management
The undefined risk side is the Achilles heel of BWBs. Set mental stop-losses at specific price levels (e.g., close if stock reaches $118 in our example).
Never let a BWB run wild into unlimited territory. The high probability of profit doesn't matter if one loss wipes out 10 winners.
BWB vs. Standard Butterfly vs. Iron Condor
| Feature | Broken Wing Butterfly | Standard Butterfly | Iron Condor |
|---|---|---|---|
| Cost to enter | Credit or small debit | Debit (cost money) | Credit |
| Risk profile | Defined one side, undefined other | Defined both sides | Defined both sides |
| Directional bias | Slight bias (bullish or bearish) | Neutral | Neutral |
| Max profit | Medium (wing width + credit) | High (relative to cost) | Limited to credit received |
| Probability of profit | High (65-85%) | Lower (30-50%) | High (65-80%) |
| Complexity | High (4 legs, asymmetric) | Medium (4 legs, symmetric) | Medium (4 legs, two spreads) |
| Best for | High-prob income with slight bias | Neutral, high-reward pinpoint plays | Wide neutral range, consistent income |
Common Mistakes to Avoid
1. Ignoring the Undefined Risk
Many traders focus on the high probability and forget one side has unlimited risk. Always have a plan for what to do if tested.
2. Holding Too Close to Expiration
Gamma risk near expiration can turn winners into losers overnight. Close 3-5 days before expiration if near short strikes.
3. Poor Strike Selection
Placing the broken wing too close increases the chance it gets tested. Keep it far OTM with <15% probability of touching.
4. Not Taking Profits
Waiting for max profit at expiration is greedy. Take 50-75% profit early and redeploy capital into new trades.
5. Trading in Low IV
BWBs need decent premium to collect credits. In low IV environments, you won't get enough credit to make the risk/reward attractive.
Key Takeaways
- ✓ Asymmetric butterfly where one wing is further OTM ("broken")
- ✓ Collect credit or pay small debit—more capital efficient than standard butterfly
- ✓ One side has undefined risk—critical to monitor and manage
- ✓ High probability of profit (65-85%) with proper strike selection
- ✓ Directional bias—slightly bullish (put BWB) or bearish (call BWB)
- ✓ Best in high IV environments when expecting mean reversion
- ✓ Take profits at 50-75% of max profit—don't be greedy
- ✓ Close 3-5 days before expiration to avoid gamma risk
- ✓ Set stop-losses on undefined risk side—never let it run wild
- ✓ More complex than iron condors—requires active management
Start Trading Broken Wing Butterflies
Use ApexVol's professional tools to analyze, build, and visualize BWBs. Calculate Greeks, probability of profit, and test different strike combinations before entering trades.
Related Options Strategies
Butterfly Spread
Standard symmetric butterfly - foundation for BWB.
Iron Condor
Similar risk profile but wider profit zone.
Understanding related strategies helps you choose the best approach for your market outlook and risk tolerance. Each strategy has unique characteristics that make it suitable for different market conditions.