A Broken Wing Butterfly (BWB) is an advanced options strategy that tweaks the classic butterfly spread to create a defined-risk, directional trade, often with little or no upfront cost. It’s like a butterfly with one wing longer than the other, giving it a lopsided risk/reward profile.
Anatomy of a Broken Wing Butterfly
Broken Wing Butterfly involves three strike prices and typically uses either all calls or all puts:
- Buy 1 option at strike A (lower strike)
- Sell 2 options at strike B (middle strike)
- Buy 1 option at strike C (higher strike), but not equidistant from B
The “broken wing” comes from uneven spacing between the strikes, usually the long option on one side is farther out, reducing or eliminating risk in that direction.
Why use a Broken Wing Butterfly
- Directional Bias: Unlike a standard butterfly, BWB leans bullish or bearish.
- Defined Risk: You know your max loss and max gain upfront.
- Credit Entry (Sometimes): If structured right, you can enter for a net credit.
- High Probability: Especially when the short strike is placed out-of-the-money.
Example: Bearish Broken Wing Put Butterfly on SPY
| Leg | Strike | Action | Premium (Est.) |
|---|---|---|---|
| Long Put | 540 | Buy 1 | $4.10 |
| Short Puts (x2) | 530 | Sell 2 | $2.00 each |
| Long Put (farther OTM) | 520 | Buy 1 | $0.70 |
Trade Metrics
- Net Debit: ~$0.80 ($80 per spread)
- Max Profit: ~$920 if SPY lands at 530 at expiration
- Max Loss: Limited to $80
- Breakevens: ~539.20 and ~520.80
Example: Bullish Broken Wing Call Butterfly on SPY
| Leg | Strike | Action | Est. Premium |
|---|---|---|---|
| Long Call | 530 | Buy 1 | $3.50 |
| Short Calls (x2) | 540 | Sell 2 | $2.00 each |
| Long Call (farther OTM) | 555 | Buy 1 | $0.40 |
Trade Metrics
- Net Debit: ~$0.10 ($10 per spread)
- Max Profit: $990 if SPY closes at 540 at expiration
- Max Loss: $10 if SPY expires below 530 or above 555
- Breakeven Range: ~$530.10 to ~$549.90
- Expiration: July 19 (or align with your catalyst window)
Why This Works
- Bullish Bias: You profit if SPY rises toward 540.
- Low Cost: Tiny debit means minimal capital at risk.
- Defined Risk: No upside risk—if SPY rockets, you just lose the debit.
- High Reward-to-Risk: 99:1 ratio if it pins the short strike.
Strategic Layer of Broken Wing Butterfly
This is a great way to express a wave 3 or 5 extension target, or a Fib cluster around 540. You could even ladder this with:
- A neutral fly at 535
- A bearish BWB put at 520
That gives you a tiered YOLO matrix, each leg with a thesis, capped risk, and asymmetric reward
Strategies like credit spreads, iron condors, and BWBs are favorites for blending limited risk with theta decay.
